Aside from the Great Recession and the bank failures of last year, few issues in the recent banking era have been more scandalous than Wells Fargo's (NYSE: WFC) infamous phony-accounts scandal.
Employees at the bank opened millions of credit card and bank accounts without customers' consent. Since that scandal came to light in 2016, Wells Fargo has dealt with consent orders, paid billions in fines, and done its best to overcome a reputational nightmare.
But the bank has not shed a Federal Reserve-imposed asset cap that has been the costliest punishment of all. Wells Fargo has made significant progress at cleaning house, however, and a Trump presidency, which should bring a friendlier environment for banks, could pave the way to the finish line. Here's why.
A nearly seven-year grind could be ending
The Fed first imposed the asset cap on Wells Fargo in 2018, barring the bank's total assets from surpassing roughly $1.95 trillion.
A major way banks make money is by originating loans and then collecting interest payments on those loans, so the more that banks can increase their loan portfolios and balance sheets, the more money they can make in interest payments.
Wells Fargo is among the big four banks in the U.S. along with JPMorgan Chase, Bank of America, and Citigroup. But the bank has fallen significantly behind its counterparts, with JPMorgan Chase now at $4.2 trillion in assets; even Citigroup, which has struggled with its own internal issues, is at almost $2.4 trillion.
In 2020, Bloomberg ran an analysis and estimated that the asset cap had cost Wells Fargo $4 billion in profit. If that was in 2020, I'm guessing the asset cap has cost Wells Fargo at least $10 billion in earnings.
The bank hired Chief Executive Officer Charles Scharf in late 2019 to fix the mess. The Jamie Dimon protégé is doing a good job so far. Scharf has stripped a lot from Wells Fargo's expense base, exited certain businesses to focus on its core U.S. franchise, and ramped up higher-returning businesses like credit cards and capital-light businesses like investment banking.
He has also made significant progress on Wells Fargo's many consent orders, including the asset cap. Per those orders, there are several key steps Wells Fargo must accomplish to get the asset cap removed:
- Submit plans to improve its operational and risk management program, and governance and oversight. Bloomberg reported that these plans were thousands of pages long.
- Get the plans approved by the Fed, which reportedly took multiple attempts.
- Adopt and implement the plans.
- Conduct two independent reviews of the plans.
- Submit third-party reviews to the Fed.
- The Fed's Board of Governors must vote to remove the asset cap.
Wells Fargo reportedly submitted these third-party reviews to the Fed recently, indicating that, after almost seven years, the bank has completed much of the required legwork. At a recent industry conference in early November, Wells Fargo management and analysts were bullish on the asset cap being removed.
A Trump administration should push this over the finish line
I don't think anyone expected the asset cap to last seven years, and it still could extend to eight years or more when all is said and done. Part of the reason has likely been the Biden administration's tough regulatory approach toward the banking sector.
During the past four years, bank regulators have pushed for tougher capital requirements, slowed approval timelines for bank mergers and acquisitions, and doled out their fair share of enforcement actions.
Recently, the Fed imposed an asset cap on TD Bank's U.S. operations after officials discovered that Chinese criminals had laundered millions of dollars in drug proceeds through the bank's branches in New York and New Jersey.
Wells Fargo is still not out of the woods. The initial enforcement action states that the Fed can require extra reviews after the third-party review submission.
It's also unclear how the Fed's board might vote. This is where the Trump administration could make a difference. Fed Chairman Jerome Powell's term expires in 2026, and Trump will also have an opportunity to replace at least one Fed governor during the next four years.
So, if Wells Fargo is still dealing with the asset cap at that point, the makeup of the Fed could become more favorable for banks. Ultimately, I think the asset cap should be removed by next year or early 2026.
I've been wrong before, but the market thinks the Trump administration should do the trick. Wells Fargo's stock has rallied almost 14% since the election, a huge move for a large bank stock. The writing seems to be on the wall.
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