What's behind OCC’s public rebuke of Wells Fargo?

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The heightened scrutiny surrounding Wells Fargo is setting a new precedent for the willingness of regulators to publicly bash a big bank under their watch.

Traditionally, the federal banking agencies are extremely cautious to even name specific banks, concerned the attention could lead to deposit outflows or other fallout. But the regulators — most notably the Office of the Comptroller of the Currency — appear to be taking a different tack with Wells, feeding statements to the press that do little to hide their frustration with the megabank.

Some observers have speculated that the OCC's aggressive stance is meant to deflect criticism that regulators were asleep at the wheel in identifying Wells' consumer compliance problems such as the fake accounts created for millions of customers.

“It’s almost like the OCC is trying to cover themselves now to say they are the tough regulator, which calls attention away from how they were deficient in oversight of Wells in the past,” said Cliff Rossi, a teaching fellow at the University of Maryland’s Robert H. Smith School of Business and a former senior risk executive at Citigroup.

Just an hour after Wells CEO Tim Sloan finished testifying Tuesday before the House Financial Services Committee on his bank's slew of consumer-related scandals, the OCC issued a rare public rebuke of the fourth-largest bank.

“We continue 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,” the OCC said in an emailed statement to reporters, attributed to a spokesperson. “We expect national banks to treat their customers fairly, operate in a safe and sound manner, and follow the rules of law.”

Some even raised an eyebrow at a statement by the Federal Reserve Board following the news Wednesday that Sloan's 2018 compensation was nearly 6% higher than a year earlier and included a $2 million bonus. The Fed's statement, which appeared in published reports Thursday, was more reserved than that of the OCC, but the central bank often declines any comment about individual institutions. The Fed appears to be trying to distance itself from Sloan's pay package.

“The Federal Reserve does not approve pay packages. We expect boards of directors to hold management accountable,” said a Fed spokesperson.

Karen Shaw Petrou, managing partner of Federal Financial Analytics, noted the recent regulatory statements are out of character and bring some risk with them.

“Federal regulators are generally very reluctant to speak with any specificity about any case or individual institution,” she said. “I think the back-and-forth over Wells Fargo increases political risk for the agencies with regard to the effectiveness of their enforcement efforts.”

But the agencies could also be trying to defend against accusations, particularly from lawmakers, that regulators have been too slow in penalizing Wells.

Within five minutes of striking the gavel at Tuesday's hearing, House Financial Services Committee Chairwoman Maxine Waters said regulators also needed to be held responsible for the bank’s mistakes. "Regulators seem unwilling to take forceful actions against the bank but instead are weakening Dodd-Frank safeguards protecting consumers and the economy from large firms like Wells Fargo," she said.

“The OCC has an entire staff sitting on site at Wells, sitting in on board meetings and risk committee meetings,” said Rossi. “So you have to ask yourself, where is the OCC in all of this?”

The OCC had issued a scathing report on its own failures to investigate Wells. A key finding was that the agency received 700 whistleblower complaints about Wells' practices in 2010 — five years before the Los Angeles Times first reported that Wells’ employees had been creating fake accounts to meet aggressive sales goals.

Since then, the OCC has devoted far more resources to Wells. But experts said the bank's lack of progress continues to cause anger and frustration.

Other observers said the OCC's statement reveals the agency's frustration with the bank, and could signal that the agency could further punish Wells. Some saw the OCC's statement as a sign that the agency may have viewed Sloan's testimony as presenting a rosy picture of Wells' regulatory condition.

“The OCC threw a brushback pitch,” said Thomas Vartanian, a law professor at George Mason University and former OCC official.

Lawmakers appeared to be similarly frustrated with Sloan at his hearing when he responded to questions about the bank’s discussions with the OCC, particularly related to the possible removal of senior executives.

“Are you aware that the OCC is considering whether to force out additional executives or directors at Wells?” asked Rep. William Lacy Clay, D-Mo.

“I’ve had no conversations on that topic with the OCC,” Sloan replied.

Other lawmakers questioned whether the OCC had directed Wells in some recent hires.

Rep. Ann Wagner, R-MO, expressed surprise when Sloan explained that Mike Roemer, a former head of compliance for Barclays, had just joined the bank in January.

“Did the regulators tell you to get rid of your chief compliance officer?” Wagner asked.

"No, I made that decision," Sloan said.

In a research note issued after the hearing, Isaac Boltansky of Compass Point Research & Trading said that even though "Wells Fargo has clearly taken steps to address the account scandal and the cultural concerns at the core of the bank’s problems ... there is pronounced frustration in Washington regarding the pace of change, the seemingly steady stream of subsequent setbacks, and consumer redress efforts."

"The OCC’s rapid rebuke of Wells Fargo’s testimony is another concerning signal for the bank as the regulator did not want a single news cycle to turn without making its dissatisfaction publicly known," Boltansky said.

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Crime and misconduct Enforcement actions Compliance Risk management Tim Sloan Maxine Waters House Financial Services Committee OCC Wells Fargo