WASHINGTON -- Wells Fargo had six months to fix problems regulators identified in its living will, but when the dust settled, the Federal Reserve and Federal Deposit Insurance Corp. said it fell short again, raising concerns about how and why the San Francisco bank couldn't fix its problems.

It's a question the bank itself will need to figure out how to answer – and soon. It has until March 31, 2017 to submit revisions or face additional sanctions beyond ones imposed this week.

Although Wells released a statement saying it did everything it could to meet regulatory expectations, there is evidence that the bank made a number of strategic mistakes and ignored multiple warning signs from regulators.

Following is a guide to what went wrong, based on interviews with those close to the process who declined to speak on the record:


Wells may not have put enough resources behind the effort

Going into the 2015 evaluations, Wells appeared to be in a relatively good position. Regulators had cleared its tentative plan in 2013 and it was widely considered the easiest large bank to resolve given its focus on traditional banking activities.

But by the evaluations of the 2015 plans released in April of this year, it was clear regulators saw serious problems with Wells' resolution plans. Of the five banks that failed, Wells was subject to the most severe criticism.

"If you look at where Wells stood compared to the others back when the April letters were sent it appears it had the higher hill to climb," said one former FDIC official. "That suggests that they may not have as many resources dedicated to the effort as the others."

In their April feedback, the regulators provided a harsh assessment of Wells' plans, saying it had identified "material errors" in its projections and doubting the firm's commitment to the process.

The mistakes "call into question the extent to which there was appropriate internal review and coordination with respect to the 2015 plan prior to its submission," the regulators said.

The bank does not appear to have appeased regulators. The agencies on Tuesday chastised Wells for kicking the can down the road on certain aspects of it. "A plan to eventually take the initial steps required to identify the actions and project plans required" by the first quarter of 2017 " is not sufficient," they said.

In some cases, the bank offered aspirational language describing how it would solve problems, rather than specific plans about how to proceed, regulators said.



Wells was distracted by its phony accounts scandal

Industry observers said that six months was a tight, but doable, timeline to fix problems identified by regulators. But Wells had an extra hurdle that other institutions didn't – the fake accounts scandal.

In September, the Consumer Financial Protection Bureau, Los Angeles City and Office of the Comptroller of the Currency imposed $190 million in fines and restitution on the bank, after it was revealed that employees had created more than more than 2 million bogus accounts over a period of five years. In October, Wells Fargo's CEO John Stumpf stepped down.

It is likely that the sham accounts scandal – which occurred during the final dash before the October living wills resubmission deadline – could have severely distracted the bank and taken resources away from the resolution planning process.

"The bank least likely to cure these deficiencies was Wells simply because they had so many other challenges in the period," said one source involved in producing the living wills of large banks. "That's probably the most vital time – September and October -- to get this right."



The bank stuck to its multiple point of entry strategy

Wells Fargo was the last bank standing with a plan to resolve itself through a so-called multiple point of entry approach, which led to speculation that regulators want to abolish that strategy.

The bank intended to address a failure scenario by establishing a bridge bank –managed by the FDIC -- that would operate as a going concern, while the holding company and other entities would be resolved separately.

The other large banks had opted instead for the single point-of-entry strategy – in which the holding company files for bankruptcy, while the subsidiaries are allowed time to either continue operating or pay off creditors and wind down in an orderly manner.

Because Wells has less involvement in broker-dealer and other nonbank businesses relative to its competitors, some say its structure might be better adapted to the multiple-point-of-entry strategy.

Its business lines are more bank-focused, so it would be easier to organize assets under a bridge bank and resolve all the other entities separately.

"Wells is a very, very different type of banking organization than everybody else in the group," said the source who helped produce big banks' living wills. "Wells ... is basically the bank. The idea of entry at both levels, the holding company and the bank, could more readily work."

In their letter to Wells on Tuesday, regulators reiterated the same concerns that they had brought up in April – namely, that the bank had not performed the proper analysis to establish how it would deal with shared services between subsidiaries during failure; and how its business structure would allow for a failure through multiple-point-of-entry.

Those criticisms appeared tied at least in part to Wells' strategy.

The firm's plans to simplify its structure "do not address the specific resolvability risks related to the firm's bridge bank strategy," the Fed and the FDIC said in the letter.

Many observers said this could easily be read as a sign that regulators favor a single-point-of-entry strategy, no matter the firm's structure.

Senior agency officials denied this, saying during a phone call with reporters Tuesday that they were agnostic as to each firm's strategy.

To be sure, Wells was not the only one to be criticized over how it planned to simplify its business structure. Bank of America faced a similar rebuke from regulators in April.

Similarly, Bank of New York Mellon was criticized in April over the question of shared services across separate entities of the banks and how those would be distributed during failure.

This time around, both Bank of Amercia and BNY passed. BNY Mellon even received praise from regulators for switching from a multiple-point-of-entry to a single-point-of-entry strategy.

BNY "chose to address the operational issues associated with the executability of the bridge bank strategy outlined in its 2015 plan by presenting an alternate resolution strategy," agencies said in their latest feedback to the firm. "The 2016 submission described a single point of entry strategy."

Another source familiar with the living wills process said that "if you read between the lines, they're actually criticizing that strategy," referring to multiple point of entry.

"Wells is the only firm that's utilizing it," the source said.

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