The financial regulator has shut down its probe into an accountancy firm's audit of HBOS.

The Financial Reporting Council (FRC) said it was no longer looking at KPMG work in relation to the business which was hit by heavy loan losses during the financial crisis.

It said the firm's work for HBOS, now part of Lloyds Banking Group which includes the Bank of Scotland “did not fall significantly short of the standards reasonably to be expected of the audit”, the test that would be applied by a tribunal.

The investigation related to the signing off of HBOS’s 2007 accounts, the year before the Labour Government bailed it out to the tune of billions of pounds.

KPMG had endorsement of the bank’s belief that the accounts should be prepared on a going concern basis, which meant it expected to be able to fund itself for the year ahead.

“The evidence of market conditions at that time did not show this decision of HBOS or the auditor’s assessment of it to be unreasonable at the time,” said the Financial Reporting Council.