The living will failure isn’t just a blow to Wells Fargo’s business, but another hit to its reputation, which has been battered in recent months following revelations employees opened roughly 2 million fake accounts.
The living will failure isn’t just a blow to Wells Fargo’s business, but another hit to its reputation, which has been battered in recent months following revelations employees opened roughly 2 million fake accounts. Image: Bloomberg

WASHINGTON — The hits just keep coming for Wells Fargo.

Of the five banks that failed their living will tests earlier this year — key evaluations meant to determine whether a company is capable of dismantling itself in a crisis without government intervention — only Wells Fargo failed an assessment of their revised plans, federal banking regulators said Tuesday.

The failure will have immediate repercussions for the San Francisco bank, which is prohibited from expanding internationally and buying nonbank subsidiaries.

"In light of the nature of the deficiencies and the resolvability risks posed by Wells Fargo's failure to remedy them, the agencies have jointly determined to impose restrictions on the growth of international and non-bank activities of Wells Fargo and its subsidiaries," the regulators said in a press release. "In particular, Wells Fargo is prohibited from establishing international bank entities or acquiring any non-bank subsidiary."

It wasn't just a blow to Wells' business, but another public relations headache for a bank that has been battered by them during the past three months. The New York Times revealed Saturday that the phony account scandal that has plagued the bank since September has been expanded to possibly include false insurance sales, while Reuters said last week that Wells had received a poor "needs to improve" rating for its Community Reinvestment Act assessment.

Those follow weeks of negative headlines for the bank stemming from a settlement in which the bank agreed to pay $190 million in fines and restitution after more than 5,000 employees were found to have opened up roughly 2 million fake accounts in an effort to meet sales goals.

The scandal has already cost Wells its chief executive officer, but this latest bevy of bad news may keep pressure on the bank to do more. It will also undoubtedly add yet more ammunition to efforts by some on the left and right of the political spectrum to break up big banks, arguing that Wells inability to determine how to resolve itself is proof it is too big to manage.

In a statement, Wells Fargo said it had taken the revised submission seriously and believed it had addressed regulators' issues.

"While we are disappointed with the determination issued by the agencies, we continue to be dedicated to sound resolution planning and preparedness," the bank said. "We believe we will be able to address the concerns."

The first signs of trouble for the bank related to living wills came in April, when regulators flunked five of the eight largest U.S. banks — Wells, Bank of America, JPMorgan Chase, State Street and BNY Mellon — resolution plans. All were forced to fix the problems by Oct. 1. Of those five, only Wells failed its resubmission.

In April, Wells' was particularly required to address deficiencies in three areas. The first relates to the firm's legal entity rationalization — the ability of the company's various legal entities to be aligned in such a way that will make resolution more simple and straightforward. The second deficiency was operational; the agencies found that Wells had not identified what critical services must remain intact in the event of a resolution and how to ensure that those services would remain intact. The final deficiency related to governance, particularly related to the firm's internal oversight and coordination of a resolution process.

The letter sent Tuesday from the Federal Reserve and Federal Deposit Insurance Corp. to Wells noted that it had adequately remedied its governance deficiencies in its revised plan, but the other two issues were unresolved. The agencies said that much of the bank's approach toward legal entity rationalization is confined to a few sentences of aspirational guidance, and little thought appears to have been put into precisely how a resolution might take place.

"The 2016 submission did not include the considerations that would guide the evaluation of size, interconnectedness, growth prospects, risk parameters, and geographic footprint underlying the monitoring process and the actions that would ensure the firm's organizational structure is aligned with its resolution strategy," the letter said.

Wells now has until March 31, 2017 to address the outstanding shortcomings. If the bank fails to submit an amended plan, or if its amended plan is determined not to address those deficiencies, Wells may be subject to additional sanctions. Among them would be a hard asset cap on is nonbank operations, which may "not exceed the level reported as of September 30, 2016" and an asset cap on Wells' broker-dealer business based on reported assets as of the same date.

If Wells has not resolved the issues by Dec. 13, 2018, the regulators — in conjunction with the Financial Stability Oversight Council — may require the bank to divest certain assets or operations, according to a senior agency official who spoke to media on a conference call.

The official added that the determinations were not related to Wells' recent troubles related to its settlement with the Consumer Financial Protection Bureau regarding thousands of employees creating fraudulent accounts unbeknownst to its customers.

One immediate consequence for Wells is that it will put a halt to its recent efforts to expand internationally and through nonbanks.

Though not known for its international presence, Wells has been on a buying spree of late. It completed the purchase in August of the Australian and New Zealand segments of GE Capital's commercial distribution finance business and the 2013 purchase of Commerzbank's Hypothekenbank Frankfurt U.K.'s commercial real estate portfolio. In October, it completed the acquisition of nonbank Analytic Investors, an investment management firm based in Los Angeles.

—Alan Kline contributed to this article. 

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