On Tuesday, Wells Fargo cleared a significant hurdle in its growth plan as the Federal Reserve announced the removal of the $1.95 trillion asset size limit imposed on the bank in 2018. This restriction stemmed from the 2016 fake account scandal that shocked the United States and was considered one of the harshest penalties in US regulatory history. The removal of this cap paves the way for Wells Fargo to pursue growth after years of limitations.
Meeting Regulatory Conditions
The Federal Reserve stated that Wells Fargo had met all the conditions required to lift the restrictions imposed in 2018. The bank’s remedial measures, third – party evaluations, and its own corporate governance and risk management plans were thoroughly reviewed and deemed satisfactory. The Federal Reserve acknowledged that Wells Fargo had made “substantial progress” in addressing its shortcomings, particularly in governance and risk management, which justified the removal of the unprecedented growth constraint.
Market Response and Share Price Performance
Wells Fargo’s share price rose by over 2% after the market closed on Tuesday, compared to a 1.3% increase during regular trading hours. Although the bank’s share price has risen since the regulatory order was imposed in 2018, its performance has lagged behind that of its peers and the overall stock market. From April 20, 2018, to Monday, Wells Fargo’s share price increased by 43.9%, while JPMorgan Chase’s share price rose by 138.9%, Bank of America’s by 47.6%, and the Financial Select Sector SPDR ETF (XLF) by 83.2%. The S&P 500 index surged by 123.6% during the same period.
Financial and Regulatory Impact
Wells Fargo has paid billions of dollars to address potential liabilities and fines related to the fake account scandal. The bank was accused of opening millions of unauthorized customer accounts across multiple business areas. This included a $3 billion fine paid to the US Department of Justice and securities regulatory agencies. The asset cap was one of numerous restrictions placed on the bank, but it was among the most significant.
CEO’s Perspective and Future Outlook
Wells Fargo CEO Charlie Scharf expressed that the lifting of the asset cap “marks a key milestone in our transformation journey at Wells Fargo.” He emphasized that the bank’s efforts have led to it becoming a stronger and different institution. Scharf highlighted that this achievement is a testament to the contributions of Wells Fargo’s 215,000 employees. He previously stated at an industry conference that the bank had met the regulatory risk and control standards, and he was confident that the asset cap would be lifted. Scharf outlined that with the cap removed, Wells Fargo plans to expand in a “controllable and linear manner,” particularly in corporate deposits and corporate and investment banking, areas where growth had been stifled during the cap period.
Conclusion
The removal of the asset size limit by the Federal Reserve is a significant step forward for Wells Fargo. It not only marks the end of a challenging period stemming from the fake account scandal but also opens new opportunities for the bank to grow and compete more effectively. As Wells Fargo looks to the future, the focus will be on leveraging its improved governance and risk management to achieve sustainable growth and restore its position relative to its peers in the financial sector.
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