The seven-year regulatory shackle has come to an end! Federal Reserve lifts Wells Fargo (WFC.US) asset growth restrictions

The US financial industry has ushered in a historic moment.

The Zhitong Finance App learned that the Federal Reserve announced on Tuesday that it will officially lift the asset growth restrictions imposed on Wells Fargo Bank (WFC.US) since 2018. This restriction stems from the fake account scandal that shocked the US in 2016, and was once regarded as one of the harshest penalties in US regulatory history. Wells Fargo shares rose 3% in after-hours trading after the news was announced.

The Federal Reserve said in a statement: “Wells Fargo has met all the conditions in the 2018 regulatory order to lift growth restrictions. The lifting of growth restrictions reflects the bank's significant progress in addressing its own shortcomings.” However, the Federal Reserve emphasized that other provisions in the 2018 regulatory order will continue to be in effect until banks have completed all compliance requirements.

This decision has long been anticipated among investors, analysts, and banking executives. San Francisco-based Wells Fargo has lifted several regulatory orders in recent years, and growth restrictions and a decade-old order from the US Monetary Commission (OCC) were the last two major regulatory pressures it faced.

In February 2018, the Federal Reserve set a limit on the total asset size of a bank for the first time, requiring Wells Fargo's assets not to exceed $1.95 trillion at the end of 2017 until its corporate governance and internal control mechanisms meet regulatory standards. The move was a pioneer, and it also showed that the supervisory authorities were highly alert to the seriousness of Wells Fargo's systemic problems at the time.

The fake account scandal stemmed from 2016 when the Consumer Financial Protection Bureau (CFPB) discovered that Wells Fargo employees had opened more than 2 million savings and credit card accounts without customer authorization since 2011. Aggressive sales targets and cross-selling reward systems have induced irregularities among employees and aroused strong public outrage. Wells Fargo shares fell 12% in response in September 2016.

At the time, the CFPB imposed a record fine of $100 million on Wells Fargo, the OCC fined an additional $35 million, and the city and county of Los Angeles also claimed $50 million. The Federal Reserve's asset cap has become the ultimate regulatory weapon, and only applies to situations where “serious irregularities or long-term rectification is ineffective.” The day before the end of her term, then-Federal Reserve Chairman Yellen announced the punishment, and his successor, Powell, took over this hot potato when he took office.

This series of penalties and regulatory turmoil prompted Wells Fargo to comprehensively reconsider its corporate culture, sales model, and governance structure. At the end of 2016, Wells Fargo amended its articles of association to forcibly separate the positions of chairman and CEO, reorganize business lines, adjust senior management, and enhance board supervision and risk management mechanisms.

With the asset cap lifted, Wells Fargo still needs to be assessed by a third party to test the effectiveness and sustainability of its governance mechanism. Evercore ISI analyst John Pancari predicts that without an asset cap, Wells Fargo's annual earnings per share could increase by about $1.19, equivalent to an 18% increase, mainly due to increased deposits, higher transaction revenue, lower expenses, and increased loans. Pancari rated Wells Fargo's stock “outperforming the market,” and indicated that the benefits may be fully realized between 2025 and 2026.

However, J.P. Morgan analyst Vivek Juneja cautioned that cost savings need to be balanced with business reinvestment. He rated Wells Fargo stocks “neutral.”

The lifting of the asset cap marks the end of Wells Fargo's lengthy rectification cycle that has gone through three presidents, three CEOs, and a global pandemic since the scandal began. In 2016, Phu Quoc had about 269,000 employees; now it has been reduced by about 20%.

Current CEO Charlie Scharf took office in October 2019 to replace interim CEO Allen Parker. Parker is a former general counsel who temporarily took over after Tim Sloan's sudden retirement in March 2019. Sloan succeeded John Stumpf after the fake account incident came to light in 2016, and Stumpf has been permanently banned from the banking business. Sloan currently serves as Vice Chairman and Head of Commercial Real Estate Debt at Fortress Investment Group.