Like many big banks, Wells Fargo has spent the past few years putting its big capital cushion to work by bulking up on noncore commercial deposits and various short-term investments.

So when the Federal Reserve imposed a cap on its asset growth Friday, in an unprecedented regulatory order, Wells insisted that it could easily scale back in several areas — ditching low-yielding securities, for example — to stay within the constraints without crimping its lending.

But if there’s one thing that the banking industry knows well, it’s that regulatory orders — particularly from the Fed — have a way of sticking around for longer than expected. If that ends up being the case with Wells, the asset cap could wind up hobbling the bank’s ability to compete for loans, deposits and top talent, industry analysts said Monday.

“The longer this lingers, the more real of a concern that becomes,” said Scott Siefers, an analyst with Sandler O’Neill & Partners.

The Fed issued the order late Friday in response to what it called “widespread consumer abuses” at the $2 trillion-asset Wells Fargo. The Fed said the order would remain in place until Wells, still reeling from a phony-account-opening scandal that came to light in late 2016, “sufficiently improves its governance and controls.”

Wells also agreed to replace four members of its board — three by April, and an additional member by the end of the year.

The order requires Wells to maintain its assets at current levels until a third-party review of its compliance plan is completed to the Fed's satisfaction.

Observers said that if Wells is released from the order within the year, then the long-term impact on the bank is likely to be minimal. But if the Fed order remains in place much longer, valuable commercial clients could become antsy and start looking to move their business to a bank with a better reputation, analysts said.

Moreover, at a time when banks across the industry are on the prowl for high-performing commercial lenders, Wells could find itself at a competitive disadvantage in its efforts to attract and retain top talent.

Wells Fargo “could be vulnerable to having some of its best loan officers poached by other banks,” said Gerard Cassidy, an analyst with RBC Capital Markets, in a Feb. 5 note to clients.

Describing the regulatory order as “unprecedented,” Marty Mosby, an analyst with Vining Sparks, said it provides a fitting coda to former Chairwoman Janet Yellen’s tenure at the Fed. Mosby noted that she helped steer the central bank through the mortgage meltdown, and more recently has helped the economy “get its sea legs back,” by raising rates and starting to unwind the balance sheet.

“The last thing she can say is that she was tough on the big banks,” Mosby said. Jerome Powell was sworn in as chairman Monday morning.

Mosby also described the regulatory as “elegant” in the way it was crafted, in that it forces the heads of Wells’ business lines to more closely scrutinize the assets they place on the balance sheet, while at the same time ensuring that the bank isn’t forced to turn away consumers or businesses in need of financial services.

During a conference call with analysts Friday, company executives said that they have identified a handful of noncore businesses that the bank could shrink to try to hold the line on growth. These include $200 billion of noncore commercial deposits and the roughly $149 billion of deposits it holds from other financial institutions.

Additionally, Wells plans to pull back on certain trading assets and short-term investments. That could include “plain vanilla” assets, such as mortgage-backed securities, or more complex instruments, such as reverse repurchase agreements, according to Siefers.

In total, Wells said it expects the cap to reduce its earnings by about $400 million during 2018. The bank earned $22.2 billion in 2017.

Wells executives emphasized Friday that its core businesses, such as lending to midsize companies and consumers, will not be affected by the asset cap.

“We are in a very competitive business whether we have a consent order or not, and our marching orders to our team is to go out there and serve your customers, fulfill our vision, take deposits, make loans,” CEO Tim Sloan said on the conference call, adding that “a very small number” of customers will feel the impact of the asset cap.

In the immediate term, rival big banks, such as JPMorgan Chase, PNC Financial Services Group and U.S. Bancorp, likely stand to benefit from Wells’ effort to scale back noncore commercial deposits, according to Mosby.

The Fed’s order requires Wells to develop and submit a plan within 60 days that addresses a range of managerial and risk-control problems, stemming from the string of scandals in its retail bank. Wells did not provide an estimate of how long it could take to satisfy the Fed’s conditions.

Mosby estimated that it could be until the end of 2019 before the order is lifted.

In a “perfect world” the Fed’s order would be lifted by the end of the year, according to Siefers. He added that he had not previously expected Wells to meaningfully increase its balance sheet in 2018, in light of the industrywide slowdown in commercial lending, as well as broader efforts by the bank to scale back in other areas, such as auto lending.

Other big banks, such as Ally Financial, have recently benefited from Wells’ pullback in auto lending; Ally reported a double-digit increase in originations during the fourth quarter from a year earlier.

If the order remains in place beyond 2018, or even beyond 2019, Wells may have to target additional areas to cut, perhaps even in its core business lines, analysts said. Wells ranks among the nation’s top mortgage, auto and small-business lenders.

Still, Siefers said he doesn't expect it to come to that.

“I doubt the Fed wants to do something where it is in part responsible for restricting the flow of credit to individuals,” he said.

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Corrected February 6, 2018 at 4:58PM: An earlier version of this story mistakenly said the Fed ordered Wells to replace four directors. The Fed highlighted the action in its press release as “concurrent” with the order, but the order itself says nothing about removing or replacing individual board members.

Kristin Broughton

Kristin Broughton

Kristin Broughton is a reporter for American Banker, where she writes about the business of national and regional banking.