When it came to light in 2016 that employees at Wells Fargo (WFC 0.81%) had opened millions of depository and credit card accounts without the consent of customers, regulators did not take the matter lightly. They slapped the bank with billions in fines and banned former CEO John Stumpf from ever working in banking again.
In a more unprecedented move, the Federal Reserve imposed an asset cap on the bank in February 2018 that has essentially prevented Wells Fargo from growing its balance sheet ever since, a move that has also cost the bank billions in profits. Nearly four years later, will Wells Fargo get the asset cap removed in 2022? Let's take a look.
Has the bank improved its regulatory infrastructure?
While Wells Fargo CEO Charlie Scharf has said on past earnings calls that there is still a lot of work to do when it comes to enhancing the bank's regulatory infrastructure, there also seems to be a much better plan in place. "I'm confident that we know what to do. I'm confident that we have the people and processes in place," Scharf said at a conference in June, referring to the regulatory work that needs to be done.
A lot of work has already been done on the regulatory front. Scharf has pretty much cleaned house since coming aboard two years ago. Senior management is composed of an entirely new team, as wells as the bank's 18-member operating committee, which Scharf describes as the "senior-most group responsible for running the company." Of the 17 people on the committee in addition to Scharf, nine of them have been hired since Scharf came aboard in 2019, four are in different roles, and four were hired after the phony-accounts scandal came to light.
Furthermore, about half of the top 150 most senior leaders at the bank didn't start in their roles until 2020. The majority of the board of directors from the phony-accounts scandal period are also gone at this point.
Wells Fargo has made noticeable improvements to its regulatory infrastructure to ensure that a similar scandal cannot happen again. The bank has hired a new overall chief risk officer, as well as new chief risk officers for each division at the bank. The operating committee and Scharf are also more tuned in to regulatory issues and have a more holistic process for reviewing them, with more business segments reporting directly to Scharf. Wells Fargo has also launched a new program for customer feedback and an office of consumer practices.
Where is the bank on the timeline?
At the beginning of the year, Bloomberg reported that the Federal Reserve had privately approved Wells Fargo's proposed overhaul plan for revamping its governance and risk management infrastructure. Investors cheered the approval, which is the second of the four steps the bank would need to get through to get the asset cap removed. The bank will still need to get more proposals related to its regulatory infrastructure approved, actually implement those plans, and then undergo a third-party review. The entire Federal Reserve board will ultimately need to approve the removal of the asset cap.
Still, it's been hard to measure how close Wells Fargo actually is to getting the asset cap removed. Some analysts have previously issued research notes saying they expect the cap to be removed soon, only to be disappointed. Scharf has also told the public that they can see progress on the bank's regulatory work by looking at remaining consent orders and watching for when those get removed. While the bank got some lifted in 2021, it has also had a fresh one imposed. Scharf has been true to his words in saying that progress would not come in a "straight line."
The Fed has also been hard to read. Fed Chairman Jerome Powell said publicly that the Fed is closely monitoring the bank, that the asset cap would not be lifted until all the necessary work has been done, and that the Fed would take action if the bank didn't address the issues. These statements do not sound like the Fed is pleased with Wells Fargo, but then again it did approve one of the bank's key overhaul plans.
Will the asset cap be lifted in 2022?
I don't think I can really make a definitive statement on whether the asset cap will be lifted in 2022. But I can say a few things more assuredly. While the asset cap is not a common punishment from regulators due to its punitive nature, it is not uncommon for bank consent orders to last for four years or more, so the length of the order so far is not unheard of. Further, while the bank does have 10 remaining active consent orders to get through, some of those orders are related to one another. Wells Fargo has gotten four consent orders terminated or lifted since May 2020, so I think the bank could work through these consent orders quicker than the high number suggests.
Lastly, noting that Wells Fargo completed the second of four steps on the journey to asset cap removal in February, I at the very least would expect to hear something from the media on Wells Fargo's progress pertaining to the asset cap. If we don't hear any significant news in 2022, similar to when Bloomberg reported about approval of the overhaul plan in February, I would be very concerned over how long the asset cap could ultimately stay in place.