Wells Fargo has run afoul of banking regulators once again: On Tuesday, for the second time this year, the bank did not pass a key regulatory test that was created after the 2008 financial crisis to reduce the threats that large banks pose to the broader economy.
In April, regulators announced that they had rejected the “living will” plans proposed by Wells Fargo and four other major banks. Each bank had been required to submit a plan to unwind itself in a way that would safeguard the economy in case of the bank’s failure. Since then, all five banks have resubmitted their disaster-preparedness plans; only Wells Fargo’s plan did not pass muster.
Because of the continuing problems with Wells Fargo’s plan, the Federal Reserve and the Federal Deposit Insurance Corporation will prohibit it from establishing new international units or acquiring a subsidiary that is not a bank.
Those penalties can be lifted if Wells Fargo fixes its plan by March 31. Wells has until then to submit its plan a third time; if the problems linger too long, regulators could place additional limits on the company.
For instance, the bank could be forced to start selling assets in certain units, including at its brokerage arm.
In a statement on Tuesday, Wells Fargo said it believed it had already addressed the areas with which regulators had found fault.
“We will continue to work closely with the agencies to better understand their concerns so that we can bring our resolution process in line with their expectations,” the bank said.
Regulators said the issue with Wells Fargo’s plan was not related to its huge sham accounts fraud, which has plunged the bank into turmoil since September. Wells is still struggling to investigate and contain the damage from that scandal, in which thousands of bankers were fired for creating secret and unwanted accounts on behalf of customers, some of whom lost money or had their credit records damaged.
Still, the living-will issue is the latest black eye for Wells Fargo, which was only a few months ago was considered one of the nation’s most well-managed banks.
All the largest American banks must submit to regulators their living wills, or strategies for unwinding themselves in an orderly way — something they lacked in 2008, when the federal government had to prop up sagging banks like Citigroup and Bank of America.
The living-will requirement, passed as part of the 2010 Dodd-Frank financial overhaul, is meant to prevent taxpayers from having to bail out big banks again in the event of a huge financial failure. Of all the rules passed in the wake of the crisis, this requirement is designed to address most directly the issue of big banks’ being too big to fail.
Banking-industry lobbyists have grumbled that the living wills are another costly exercise that requires companies to spend months trying, often unsuccessfully, to divine the will of regulators. In its statement, Wells Fargo said it had created an office within the bank dedicated to correcting problems with its living-will proposal.
Democrats are holding up the living wills as an example of the strength and success of Dodd-Frank at a time when Republicans are vowing to undo parts of the law once President-elect Donald J. Trump takes office.
Senator Sherrod Brown, an Ohio Democrat who is the ranking member of the banking committee, said, “Today’s joint determination is a reminder that Wall Street reform is working to rein in the megabanks that crashed our economy and got bailed out by taxpayers.”
It is ironic, in some ways, that Wells is the one bank that continues to have problems proving to regulators that it could manage its unwinding itself in the event of a bankruptcy.
During the financial crisis, Wells avoided many of the mortgage missteps that nearly sank Wall Street. Compared with other large banks, it was relatively well capitalized to withstand the shocks of the 2008 crisis.
But its regulatory star has fallen since the sham account scandal erupted. The bank’s longtime leader, John G. Stumpf, was called to testify twice before Congress, where he faced a barrage of criticism for failing to properly manage the bank and stamp out the bad behavior. Mr. Stumpf has since stepped down. In a settlement over the illegal accounts, Wells paid $185 million — including $100 million to the Consumer Financial Protection Bureau, the largest fine that agency had ever assessed.
The regulators cited specific technical deficiencies in Wells’s living will, including issues of “shared services” and “legal entity rationalization.” These problems generally point to the fact, regulators have said, that Wells has not figured out how to adequately unwind all of the many complex and interconnected parts of its banking empire.
Regulators said the other four other banks they had faulted in April — Bank of America, Bank of New York Mellon, State Street and JPMorgan Chase — had addressed the deficiencies in their plans.
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