Wells Fargo Scores First Win in Long Road to Asset-Cap Freedom

(Bloomberg) -- Sixteen months into Wells Fargo & Co. Chief Executive Officer Charlie Scharf’s tenure, he’s scored the bank’s first real sign of progress toward escaping the shackles of a Federal Reserve-imposed cap on assets.

The company has secured the Fed’s acceptance of a proposal it submitted in September to address lapses in governance and risk management, as required by a 2018 enforcement action. In doing so, Scharf paved the way for the firm to complete the next steps needed to lift the punishment: adopting the plan and undergoing an independent review.

While Wells Fargo remains many months away from having the asset cap lifted, the Fed approval is a breakthrough after three years of limbo over what has come to be regarded as the banking industry’s worst punishment. Given the extent to which the company needs to be overhauled, executives don’t expect to have the cap removed until late this year at the earliest.

“While this is a positive first step for Wells Fargo, it’s only that: a first step,” said Jeremy Kress, assistant professor of business law at the University of Michigan’s Ross School of Business and a former lawyer for the Fed’s board of governors. “It’s probably going to take a lot of time before the Federal Reserve is comfortable lifting the asset cap.”

Wells Fargo rose 5.2% Wednesday to $36.59, the highest in 11 months, after Bloomberg reported the Fed’s acceptance of the plan. The asset cap has dragged on the San Francisco-based company’s stock and profit since early 2018, with shares tumbling almost 40% in the past three years.

The plan’s approval is a positive for investors who have had years of “constantly being disappointed” regarding the asset cap, said Jason Goldberg, an analyst at Barclays Plc. Still, he also noted that it’s just one in a series of steps needed in a wide-ranging order.

“I always think about dieting -- easy to announce you’re going to do it, hard to execute,” Goldberg said.

Scharf, who took the helm in late 2019, has repeatedly said that regulatory work is his highest priority. He’s made progress -- in January, the bank was freed from an order tied to violations of anti-money-laundering rules -- yet Wells Fargo still has 10 outstanding consent orders, with the asset cap remaining the biggest one to overcome.

Wells Fargo has refused to provide guidance on when it expects the restriction to be lifted, and declined to comment again on Wednesday. On the bank’s earnings call last month, Chief Financial Officer Mike Santomassimo said the company is focused on the issue and believes it is making progress, while acknowledging obstacles.

“There remains a significant amount of work to do and a series of steps required by the consent order, requiring both successful execution and implementation by us, and ultimately, a determination by the Federal Reserve as to when the work has been completed to their satisfaction,” he said.

Bloomberg reported in December that a number of top executives privately expect Wells Fargo won’t escape the asset cap before late this year, while key Fed officials see the process dragging into 2022 or beyond.

Dragging On

The cap, which came after a series of consumer abuses and compliance lapses, has likely cost the fourth-largest U.S. lender billions of dollars in profit by hindering its ability to grow with the industry. When it was imposed in 2018, neither the firm nor the Fed expected it to last so long, Bloomberg has reported. At the time, Wells Fargo executives publicly said they could imagine satisfying the requirements to get it lifted by the end of that year. They later extended that guidance twice, then outright withdrew it.

While consent orders typically last years, Wells Fargo’s agreement with the Fed is designed for the asset cap to come off before the order is terminated in its entirety. To get the limits lifted, the bank is required to submit a proposal to overhaul risk management and governance and get the plan accepted by the Fed -- the steps already completed -- and then implement the plan and conduct a third-party review to the satisfaction of the regulator. Then, the full Fed board will have to agree to remove the cap.

The bank could hit additional hurdles if the Biden administration populates the Fed board with nominees who may be more reluctant to remove sanctions on the scandal-ridden lender, Kress said.

“As time goes on and as the makeup of the Fed board evolves, the task gets harder for Wells Fargo to convince the Fed to lift the asset cap,” he said.

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