Pete Schroeder by Nupur Anand
WASHINGTON (Reuters) - Wells Fargo was released from a punitive, seven-year $19.5 trillion cap on Tuesday, lifting regulatory measures in the U.S. Federal Reserve, allowing banks to pursue unhindered growth.
The move delivered a major victory to CEO Charlie Scharf. Wells said it hopes to develop in areas such as credit card, wealth management and commercial banking.
"This will create a significant bump in the stock in the short term and pave the way for long-term growth, as they don't have to manage their business around asset caps now," said Brian Mulberry, client portfolio manager at Zacks Investment Management.
The Fed imposed unprecedented restrictions in 2018, including a wide range of scandals in which employees opened millions of unauthorized accounts for clients, following a high-profile bank lapse.
But the Fed said in a statement that the bank has made “significant progress” in addressing its flaws, including improving its governance and risk management plans and completing a third-party review of its overhaul.
The Federal Reserve Committee voted unanimously to lift restrictions, the first time the central bank directly ordered banks to stop development in order to address broad shortcomings.
"This marks the end of a painful period for Wells Fargo, and also reminds financial institutions to ensure that client interests are always aligned with growth goals," said Stephen Biggar, a bank analyst at Argus Research in New York.
The decision is an important step in the bank's long-term efforts to fix the losses of the scandal that broke out in 2016, attracting public criticism and billions of dollars in fines.
Scharf called the move a "key milestone".
“We are a different, stronger company today because of the work we do,” he said in a statement, adding that all full-time bank employees will receive a $2,000 reward in honor of the achievement.
JPMorgan Chase CEO Jamie Dimon once praised Scharf, once his protege and former executive at the bank. "Charlie and his team deserve a lot of credibility - working to solve the company's legacy issues," he said.
Major changes
Although the bank still faces some additional oversight as part of the 2018 order, the removal of the asset cap marks a major turnaround for the country’s fourth-largest lender, after a scandal expelled multiple executives as regulators, as fines and restrictions piled up by regulators.
"This … removes the major regulatory overhang," said Mac Sykes, portfolio manager at Gabelli Funds in New York. "It provides them with a reputation boost that is useful, providing more and different capital allocation opportunities and allowing them to increase their balance sheets."
After years of regulatory scrutiny after the 2016 scandal broke out, the bank revealed that the bank also charged unnecessary mortgage fees and forced drivers to buy car insurance they didn't need, usually to achieve sales targets.
It paid billions of dollars in fines and was also litigated by clients and shareholders. The two former CEOs left after the controversy before Salff was hired as CEO. The bank has also become a major focus of criticism in Washington, with many lawmakers calling for the removal of executives and potentially being demolished.
Lenders cleared numerous agreed orders this year, and have exceeded a dozen since 2019.
Regulators impose consent orders or public enforcement actions that are usually accompanied by fines. These orders instruct the bank to resolve the issue in a timely manner.
In 2024, Democratic U.S. Sen. Elizabeth Warren warned the Fed not to remove the cap until banks fix their risks and compliance issues.
"Despite overwhelming evidence to the contrary, the Fed decided to lift Wells Fargo's asset cap and declare a victory, an outrageous giveaway to one of Wall Street's most abandoned banks," she said Tuesday.
Schaff said last year's asset cap was undermining the bank's ability to acquire more corporate deposits and expand its trading business as peers grew.
The bank has been managing its wholesale deposit and sales operations to comply with caps, areas that will expand when restrictions are lifted.
Since the beginning of 2018, Wells Fargo’s counterpart JPMorgan has expanded nearly $2 trillion, while Bank of America and PNC Financial have increased by about $1 trillion and nearly $200 billion respectively.
Some believe that the Fed's actions are beneficial to the entire market.
"Whenever your stress is relieved or taken away from the system, especially for one of the country's largest banks, it's good for the market and the economy," said Adam Sarhan, CEO of 50 Park Investments in New York.
(Reported by Pete Schroeder in Washington and Nupur Anand, Saeed Azhar, Caroline Veletkevitch, New York; Editors of Megan Davies, Leslie Adler and Matthew Lewis)