Largest U. S. bank JPMorgan Chase & Co has agreed to pay $13 billion to settle charges related to selling of bad mortgages to investors, admitting that it frequently overstated the quality of mortgages.

JPMorgan admitted that it sold potentially bad mortgages to investors, who thought that their investments were safe. When the loans actually started turning bad, investors lost loyalty to the banking system, which inflated the housing bubble and paved the way for the financial crisis.

The $13bn-deal includes a $4 billion relief package for the Department of Housing & Urban Development, and another $4 billion for the Federal Housing Finance Agency - the operator foreign government mortgage financing firms Fannie Mae and Freddie Mac.

The civil settlement put an end to long-running tense negotiations between JPMorgan Chase and the U. S. government, which has been under intense pressure to tackle lenders' controversial practices that had paved way for the global financial crisis.

The settlement is also a big relief for JPMorgan, which had been suffering frequent declines in the market value of its shares due to the charges and the potential penalty. Following the announcement of the settlement, JPMorgan's stock gained 0.7 per cent to close at $56.15 a share on Tuesday.

The banking giant also announced that it had set aside all the money it required to cover the civil settlement, and that the settlement deal would not have any impact on its earnings.