Around £300m of this will be clawed back from the Royal Bank of Scotland's (RBS) bonus pool after the Government insisted the taxpayer should not pay for bankers' mistakes.
The Financial Services Authority (FSA) in the UK fined the bank a total of £87.5m for fixing Libor, and said at least 21 individuals and one manager were involved in inappropriate conduct at the bank.
The City watchdog, which said RBS bankers worked with traders at other banks to try to manipulate Libor, found almost 220 requests for inappropriate Libor submissions.
The CFTC said RBS, which is 82%-taxpayer owned, was attempting to manipulate the inter-bank lending rate as late as 2010 - with instances dating back to 2006.
It also published the content of messages between bank employees discussing fixing Libor.
One senior Yen trader wrote: "this libor setting is getting nutss (sic)."
Another message said: "its (sic) just amazing how libor fixing can make you that much money."
RBS also confirmed that the head of its investment bank will step down, as revealed by Sky News.
John Hourican, who was brought in to rescue the business after it was bailed out in 2008, will forfeit around £4m in share options awarded to him based on past performance, but leaves with 12 months pay worth £775,000.
In a memo to staff at the bank he said he bore "some responsibility" for misconduct , despite having no involvement in or knowledge of efforts to rig Libor submissions by RBS staff.
The bank's chief executive, Stephen Hester, told Sky News those involved in manipulating were "disgraceful".
"They are wrongdoers - there is no place in our industry for that kind of behaviour," he said.
"The issues ... are an extreme example of a selfish and self-serving culture which - while being unrepresentative of much of banking - has too many echos in what has gone wrong in the legacy of the financial boom and which we must all be clear needs to be stamped out."
Speaking at a Treasury news conference, Chancellor George Osborne, said: "What happened at RBS and other banks is totally unacceptable. At my insistence, the bankers, not the tax payers, will pick up the bill."
He added: "Those people who did wrong will face the full force of the law. It is right that the senior management at RBS have taken action today."
The bank's chairman, Sir Philip Hampton, added that it was a "sad day for RBS", but vowed to "put right the mistakes of the past".
The FSA said its portion of the penalty would be donated to military charities.
As part of its settlement, RBS agreed a deferred prosecution agreement with the DoJ, as revealed by Sky's City Editor .
The deal means that if RBS commits any form of criminal offence during the two-year period, it could have grave consequences for the bank's ability to operate in the US.
RBS' Japanese arm pleaded guilty to wire fraud.
The bank is one of about 20 organisations being investigated for manipulating Libor, the rate banks charge to lend one another.
It governs the price of more than $500trn (£320trn) worth of loans and transactions around the world, including mortgages.
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