Wells Fargo (NYSE:WFC) is reportedly one step closer to getting an extremely costly $1.95 trillion asset cap removed.

Officials from the Federal Reserve, which placed the asset cap on the bank in 2018, have apparently approved the bank's proposal for overhauling its risk-management and governance structure, Bloomberg reported today.

The approval is only the second of four steps the bank will have to take before finally getting the cap removed. However, the recent approval of the overhaul plan marks Wells Fargo's most significant progress since the cap first was implemented three years ago.

Wells Fargo

Image source: Wells Fargo.

The Fed placed the cap on Wells Fargo after the bank's phony-accounts scandal came to light in 2016, in which employees at the bank opened millions of unauthorized accounts on behalf of their customers.

The cap has cost Wells Fargo billions of dollars in profits because it prevents the bank, which is a heavy commercial lender, from originating loans and growing the balance sheet past $1.95 trillion in assets, which the bank is right up against. Growing the balance sheet is imperative for lenders when interest rates are as low as they are now.

Since Wells Fargo brought on CEO Charlie Scharf in 2019, the bank has made progress in addressing regulatory issues.

The bank hired a new chief compliance officer and five new chief risk officers to specifically oversee risk in each one of the bank's business segments. The bank also created a new unit to improve its sales practices.

But there is likely much more work ahead.

According to Bloomberg, the bank still needs to get more risk-management proposals approved, successfully implement all of these plans, and put them through a third-party review. Then the entire Federal Reserve board will need to agree to remove the cap.

Bloomberg reported last year that Wells Fargo executives still don't expect the cap to be removed until the end of this year or 2022.

Still, the fact that there is some tangible proof that Wells Fargo is making progress is significant because the cap is currently the bank's biggest roadblock. It also provides investors with a better idea of a timeline around removal.

Shares of Wells Fargo rose as much as 7.7% at one point Wednesday.

 

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