Fed chief hints Wells Fargo's regulatory issues are far from over
WASHINGTON — Federal Reserve Chairman Jerome Powell suggested Wells Fargo has a long way to go to satisfy the regulator’s demands for “fundamental” risk management upgrades.
Speaking at a press conference held after the Federal Open Market Committee’s regular meeting Wednesday, Powell said the bank’s risk management failures in recent years have required a dramatic overhaul of its processes.
“What happened at Wells Fargo was really a remarkably widespread series of breakdowns in their risk management apparatus that resulted in considerable consumer abuses,” Powell said. “And as it’s gone on and on, it’s become clear … that these are deep problems that needed to be addressed in a fundamental kind of way. So there’s a lot of work to do on that.”
Responding to a question on whether Wells will remain under a Fed-imposed asset growth cap beyond 2019, Powell suggested the firm has not made changes commensurate with the Fed’s expectations.
“We put in place an unprecedented sanction in the form of an asset growth cap, and we will not lift that until Wells Fargo gets their arms around this, comes forward with plans, implements those plans and we’re satisfied with what they’ve done,” Powell said. “That’s not where we are right now.”
Powell’s comments came as other policymakers have stepped up their criticism of Wells. The Office of the Comptroller of the Currency unexpectedly vented its frustration with the bank publicly last week, emailing a statement to reporters saying the OCC continues “to be disappointed with Wells Fargo Bank N.A.’s performance under our consent orders and its inability to execute effective corporate governance and a successful risk-management program.”
Wells CEO Tim Sloan was grilled by the House Financial Services Committee last Tuesday, followed by the news that he had earned more than $18 million in 2018 despite continuing fallout from the bank’s phony-accounts scandal and a nearly 25% drop in share price over the year. The compensation package prompted House committee Chairwoman Maxine Waters, D-Calif., to say Sloan “should be shown the door.”
Meanwhile, Powell was asked at the press conference whether he was concerned about a new wave of bank consolidation resulting from regulatory relief plans easing the post-crisis regime. The recently proposed merger between BB&T and SunTrust has spurred renewed interest from lawmakers about the potential for an increase in mergers and acquisitions.
“We’re not motivated by a particular view of industry structure that we’re trying to achieve through our regulation,” Powell said. “I think we want to have banks of all different sizes and with different business models out there carrying out their functions in the economy.”
Late last month, Sen. Elizabeth Warren, D-Mass., and other Democrats challenged Powell over the stringency of the Fed’s banking application process, calling it a “rubber stamp” that prioritizes mergers over the public interest.
“It’s time we put down the rubber stamp and let the public and everyone else weigh in before we create yet another 'too big to fail' bank,” Warren said.
The BB&T-SunTrust deal was announced a few months after the Fed proposed a sweeping overhaul of its post-crisis enhanced prudential standards regime for large banks, which has been cited as a potential spark for renewed M&A activity.
Powell said that as banks get larger, their regulatory requirements become more stringent, canceling out the potential increased risk that a larger firm might pose.
“When banks merge and move into a larger asset category, they get stronger regulation, not weaker regulation,” Powell said. “The sense of our tailoring policy is that our highest expectations fall upon the largest, most systemically important, most complex institutions, and then at every step along the way, the expectations become more tailored to the risk that that institution actually presents to the economy.”
Powell also dismissed concerns about the agency’s recent decision to limit the use of its qualitative objection in this year’s Comprehensive Capital Analysis and Review stress test, saying that the agency had telegraphed the shift away from a pass/fail framework for several years.
“We’ve been talking about that for quite a while,” Powell said. “And I think given the level that the banks have moved to in capital planning, we did that, and it shouldn’t be a big surprise. For banks that are newer to CCAR, and that haven’t made that kind of progress … they’re still going to have a qualitative test until they can reach similar levels of achievement.”