In 2018, the Federal Reserve Board's total growth restriction on
Many in and around the banking space viewed the
But after seven years, billions spent by the bank on reforms and billions more in lost potential growth, it is unclear to the rest of the banking sector and the broader public just what the San Francisco bank did to get out from under the cap.
The Fed's 169-word written statement announcing the
Sean Vanatta, a financial historian and author of "Private Finance, Public Power," a book on the history of bank supervision in the U.S., said the minimal disclosure provides little guidance to other banks that might find themselves facing similar penalties and leaves the broader public to reach its own conclusions about why the cap is being lifted now.
"The lack of transparency as to what this really means makes it hard for outside observers on either side of the question to have a sense what it is that Wells Fargo did to have this order lifted, and whether, as external observers, we should be satisfied with this," Vanatta said.
While growth restrictions are a fairly common tool for bank supervisors to compel institutions to come into compliance, the cap imposed on Wells Fargo was unique in both its size and scope. The penalty has only been used on one other large bank, Toronto Dominion, which
In some ways, the lifting of the asset cap was bound to come with unclear reasons and motives, since correspondence between banks and their regulators are often deemed confidential supervisory information.
But it isn't clear how much of the haziness surrounding the lifting of Wells' asset cap can be chalked up to prudent information management. In an appearance on CNBC on Wednesday, Sen. Elizabeth Warren, D-Mass., argued that congressional committees have long been trusted to deal with confidential information and are capable of shielding it from the broader public. Given the scale of Wells Fargo's malpractices — which resulted in the opening of millions of unauthorized credit cards and checking accounts in customers' names — she said the public deserves some insight into whether the bank has sufficiently changed its ways.
"I want the Fed to give the Congress, the Banking Committee, five years of bank examination documents. I want to see what it is that Wells Fargo represented to the Fed and what the Fed asked of Wells Fargo," Warren said. "Remember, the oversight job of Congress is both for these giant financial institutions, but it's also oversight over our regulatory agencies, including the Fed, to make sure the Fed is doing its job."
Some view the longevity of the penalty as an indictment of the Fed more than the bank. Karen Petrou, co-founder and managing partner of Federal Financial Analytics, said if Wells Fargo was consistently failing to get into compliance, its supervisors should have increased the penalty to force swifter action. On the other hand, she added, if the bank had satisfied the necessary criteria years ago, regulators should not have dragged their feet in removing the cap.
"If the supervisors are not just following picky little details and the bank is truly delinquent, then they should move past one enforcement order and slam them with another," Petrou said. "But seven years of limbo speaks to me of supervisory failure, not Wells Fargo recalcitrance."
Petrou said regulators are incentivized to keep enforcement actions in place longer than necessary to avoid being held accountable for scandals or bad actions that might arise from a bank after their release. It leaves banks in a state of perpetual limbo, she said, hinders their competitiveness.
"We need to have a much more rapid, meaningful, fish-or-cut-bait approach to supervisory orders," Petrou said.
The limited disclosure about the end of the asset cap has left other frustrating, albeit predictable, information gaps, including why the underlying enforcement action remains in place despite the removal of the growth restriction.
Fed Chair Jerome Powell told the Senate Banking Committee in 2018 that Wells Fargo would not have to fully implement its remediation plans to have the cap lifted, but that it merely needed to be "on track."
Mayra Rodriguez-Valladares, a financial risk consultant, said it is not unusual for enforcement actions to be pulled back in phases. She noted that the Fed could have kept the enforcement action in place because of lingering concerns about Wells Fargo's governance and risk management, but added that she would have liked the board to make that distinction clear.
"What does this mean? Was there just a lag or are you still finding problems? It does send mixed signals, removing the cap while keeping the enforcement action in place," she said. "They really should have explained what they were thinking."
The order imposing the asset cap provides some broad standards for withdrawing the asset cap specifically. The action, which was approved by a 3-0 vote of a depleted Federal Reserve Board on February 2, 2018 — then-Chair Janet Yellen's
Wells Fargo would first have to submit written plans for improving its governance and risk management. Then, those plans would have to be approved by officials in Washington and at the Federal Reserve Bank of San Francisco. The bank would then have to implement those plans and have its actions reviewed by a third party. Finally, Wells Fargo would have to get a notification, in writing, from the Fed that the prior three conditions had been met.
Since then, Wells Fargo has taken numerous steps to address its shortcomings, including building out comprehensive, firm-wide compliance and oversight programs. The growth restriction has also caused it to wind down products, sell off business lines and avoid certain types of deposits.
"We are a different and far stronger company today because of the work we've done," Wells Fargo CEO Charlie Scharf said in a written statement Tuesday after the cap was removed.
But when and how those efforts became sufficient to satisfy regulators and why it took the bank so long to reach that point is unclear. Wells Fargo, through a spokesperson, declined to comment on its efforts to get out from under the asset cap.
In a 2018 Senate Banking Committee hearing held shortly after the Fed's enforcement action against Wells Fargo, Warren pressured Powell to commit to additional transparency measures related to the cap, including a public vote on its ultimate removal and the disclosure of the third-party review of the bank's reforms.
In a follow-up letter, Powell said the confidential supervisory and personal information likely to be included in the third-party report would probably prohibit the Fed from releasing even a redacted version. But, he committed to review the report and "determine whether and to what extent the report can be publicly disclosed without impairing protected interests."
The Fed's vote to remove the cap, which took place on May 30, did not have a public component. The Fed also has not indicated whether it will release the third-party review, which was originally supposed to occur by September 30, 2018.
The lifting of the asset cap has been largely expected by investors and appears to have been priced into the bank's stock — which closed at $75.38 on Wednesday, slightly below the $75.65 it closed at on Tuesday before the announcement — ahead of the cap's removal. The bank had already been freed from
Todd H. Baker, a senior fellow at Columbia's Richman Center for Business, Law & Public Policy and Managing Principal at Broadmoor Consulting, said the period of growth restriction and strict oversight has likely made Wells Fargo a stronger bank, forcing it to not only improve its compliance functions but also operate more efficiently.
Given how closely lawmakers and the broader public are likely to scrutinize the bank moving forward, Baker said the Fed must have a high level of confidence in Wells Fargo to avoid further scandals, at least for the foreseeable future.
"The last thing the regulators want is to announce the removal of this asset cap and then two months later, issue another enforcement action for something serious," he said. "So, it's an indication that they really do feel that, after all those years, Wells has taken enough steps that they're in a relatively confident position as to the likelihood of future blowups."
Still, the lack of explanation from the Fed — whatever the reason — leaves an information void that can only be filled by speculation. Vanatta said that is not a desirable outcome, particularly in light of how closely the removal of Wells Fargo's regulatory shackles align with the arrival of the new Trump administration, which has championed lighter regulation in pursuit of greater economic growth.
"It leaves a lot of room for questions," Vanatta said. "Personally, I'm content to take the Fed's word that Wells Fargo has met the criteria, but because we don't have any insight into how — into what that means — it makes it look like it could be a political action, or the Fed is trying to preemptively defend itself from criticism by just ending this case and trying to move on."
