The financial industry in the United States has witnessed a historic moment as the Federal Reserve announced on Tuesday that it has officially lifted the asset growth restrictions imposed on Wells Fargo since 2018. This restriction, originating from the 2016 fake account scandal, was once regarded as one of the harshest penalties in US regulatory history. Following the announcement, Wells Fargo’s share price rose by 3% in after – hours trading.
Meeting Regulatory Conditions
The Federal Reserve stated that Wells Fargo has met all the conditions for lifting the growth restrictions as stipulated in the 2018 regulatory order. This decision reflects the significant progress the bank has made in addressing its deficiencies. However, the Federal Reserve emphasized that other provisions of the 2018 regulatory order will remain in effect until the bank completes all compliance requirements.
Long – Awaited Decision
This decision was long – anticipated among investors, analysts, and banking executives. Wells Fargo, headquartered in San Francisco, has successively lifted several regulatory orders in recent years. The growth restrictions and an order from the Office of the Comptroller of the Currency (OCC) are the last two major regulatory pressures it faces.
Background of the Asset Cap
In February 2018, the Federal Reserve set a limit on the overall asset size of the bank for the first time, requiring Wells Fargo’s assets not to exceed $1.95 trillion at the end of 2017 until its corporate governance and internal control mechanisms met regulatory standards. This move set a precedent and indicated the regulators’ high vigilance regarding the severity of Wells Fargo’s systemic problems.
The Fake Account Scandal
The fake account scandal began in 2016 when the Consumer Financial Protection Bureau (CFPB) discovered that Wells Fargo employees had opened over two million savings and credit card accounts without customer authorization since 2011. Aggressive sales targets and cross – selling incentive systems had induced these violations, triggering strong public outrage. In September 2016, Wells Fargo’s share price dropped by 12%.
At that time, the CFPB imposed a record fine of $100 million on Wells Fargo, the OCC added a fine of $35 million, and the City and County of Los Angeles claimed $50 million in compensation. The asset cap from the Federal Reserve became the ultimate regulatory weapon, applicable only in cases of “serious violations or long – term ineffective rectification.”
Comprehensive Reforms at Wells Fargo
This series of penalties and regulatory storms prompted Wells Fargo to comprehensively reflect on its corporate culture, sales model, and governance structure. In late 2016, Wells Fargo revised its articles of association, forcibly separated the positions of the chairman and the CEO, rectified its business lines, adjusted the senior management team, and strengthened the supervision of the board of directors and the risk management mechanism.
Future Outlook and Analysts’ Views
With the lifting of the asset cap, Wells Fargo still needs to undergo a third – party assessment to test the effectiveness and sustainability of its governance mechanism. Evercore ISI analyst John Pancari expects that without an asset cap, Wells Fargo’s annual earnings per share could increase by approximately $1.19, equivalent to an 18% growth. This is mainly attributed to increased deposits, rising trading income, reduced expenditures, and increased loans. Pancari rates Wells Fargo’s stocks as “outperform” and points out that the positive factors may be fully manifested between 2025 and 2026.
However, Vivek Juneja, an analyst at JPMorgan Chase, cautioned that the saved costs need to be balanced with business reinvestment. His rating on Wells Fargo’s stocks is “neutral.”
End of a Long – Standing Rectification Cycle
The lifting of the asset cap marks the end of a long – standing rectification cycle for Wells Fargo. Since the scandal erupted in 2016, the bank has gone through three presidents, three CEOs, and a global pandemic. In 2016, Wells Fargo had approximately 269,000 employees, but now it has decreased by about 20%.
Current CEO Charlie Scharf took office in October 2019, replacing interim CEO Allen Parker. Parker, the former general counsel, temporarily took over after Tim Sloan’s sudden retirement in March 2019. Sloan succeeded John Stumpf after the fake account incident was exposed in 2016, and Stumpf has been permanently banned from the banking industry. Sloan is currently the vice chairman and head of commercial real estate debt at Fortress Investment Group.
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