Editor’s Note: This story has been updated to incorporate an April 8 announcement by the Federal Reserve Board.
The Federal Reserve Board on Wednesday announced it has decided to “temporarily and narrowly” modify lending restrictions on Wells Fargo so that the bank can provide additional support to small businesses financially struggling amid the coronavirus pandemic.
In February 2018, the Federal Reserve imposed an asset cap on Wells Fargo, restricting the scandal-plagued bank from growing larger than its 2017 total asset size ($1.95 trillion). The cap was imposed due to the bank’s systemic failures to stop a host of consumer abuses and compliance breakdowns in its banking, lending, and auto insurance divisions—which included opening millions of fake accounts in customers’ names and overcharging customers in its mortgage and auto loan businesses.
But then came the coronavirus pandemic and, with it, the largest emergency economic stimulus package in U.S. history. Signed by President Trump on March 27, the 880-page Coronavirus Aid, Relief, and Economic Security Act (CARES Act) established, in part, a $349 billion small-business lending program, called the Paycheck Protection Program (PPP).
The change will only allow Wells Fargo to make additional small business loans as part of the PPP and the Federal Reserve’s forthcoming Main Street Lending Program. “The Board will require benefits from the PPP and the Main Street Lending Program to be transferred to the U.S. Treasury or to non-profit organizations approved by the Federal Reserve that support small businesses,” the Fed stated. “The change will be in place as long as the facilities are active.”
The Federal Reserve Board also noted the cap it had put in place “does not prevent the firm from engaging in any type of activity, including the PPP, the Main Street Lending Program, or accepting customer deposits. Rather, it provides an overall cap on the size of the firm’s balance sheet. The change today provides additional support to small businesses hurt by the economic effects of the coronavirus by allowing activities from the PPP and the Main Street Lending Program to not count against the cap.”
“Wells Fargo appreciates the targeted action of the Federal Reserve to support the needs of small businesses through PPP and looks forward to expanding relief to many more small businesses and nonprofits,” CEO Charlie Scharf responded in a statement.
The move by the Federal Reserve Board answers pleas earlier made by Wells Fargo. In a prepared statement released April 5, Scharf had expressed concern that Wells Fargo “continues to operate in compliance with an asset cap imposed by its regulator, due to actions of past leadership. While we are actively working to create balance sheet capacity to lend, we are limited in our ongoing ability to use our strong capital and liquidity position to extend additional credit.”
“We are committed to helping our customers during these unprecedented and challenging times but are restricted in our ability to serve as many customers as we would like under the PPP,” Scharf added. Due to the restrictions, Wells Fargo said it could distribute only up to $10 billion in loans and, thus, would have focused on serving two groups of customers: non-profits and small businesses with fewer than 50 employees.
Banking on a boon
Lifting the cap is a boon for Wells Fargo, to say the least. In a March 4 scathing report, the House Financial Services Committee criticized Wells Fargo’s previous senior leaders for focusing too much on the cap, “rather than addressing the company’s systemic risk management weaknesses,” the report stated.
“Wells Fargo’s repeated submission of materially incomplete and unacceptable plans to the Federal Reserve appears to have been driven, in part, by the desire of key leaders within the company to quickly exit the public consent order and lift the asset cap, rather than fully remediate the systemic problems that necessitated the order,” the report continued.
The House committee report went on to cite numerous meetings Federal Reserve staff had with Wells Fargo senior executives, as well as several internal Wells Fargo communications, that support its argument. “The obsession of Wells Fargo’s key leadership with lifting the asset cap had a counter-productive effect on the company’s ability to address the issues underlying the 2018 Federal Reserve consent order,” the report states.
In notes from a Jan. 24, 2019, meeting with senior Wells Fargo executives, for example, Federal Reserve staff continued to express concerns that,“[Wells Fargo] leadership seems to remain focused on lifting the asset cap by the end of the year as the primary goal and is shaping remediation plans around that. This is affecting the way management is thinking (or being asked to think) about how remediation should be shaped and accomplished.”
Wells Fargo supporters and critics
Some, including the bank’s toughest critics, sided with Wells Fargo regarding its request to lift the asset cap. Sheila Bair, former chair of the Federal Deposit Insurance Corporation, tweeted on April 6: “OK. I’ll go out on a limb here. I think Wells Fargo should be given latitude to make CARES Act small business loans even if that expands its balance sheet beyond current regulatory limits.”
OK. I’ll go out on a limb here. I think Wells Fargo should be given latitude to make CARES Act small business loans even if that expands its balance sheet beyond current regulatory limits.— Sheila Bair (@SheilaBair2013) April 6, 2020
Dennis Kelleher, president and chief executive officer of Better Markets—a non-profit group he co-founded in the wake of the 2008 financial crisis to champion for stronger oversight of megabanks—also had commented that the Federal Reserve “should consider temporarily suspending the asset cap for the limited purpose of enabling Wells Fargo to help businesses and customers suffering from the coronavirus crisis, particularly but not exclusively as it relates to CARES Act programs and activities.”
“Regardless of any temporary relief granted, the asset cap should only be fully removed by the Federal Reserve after Wells Fargo demonstrates conclusively that it has satisfied all of the supervisory concerns and conditions that gave rise to the imposition of the cap in the first place,” Kelleher said. “By prior commitment, the Federal Reserve can only take such action at a duly noticed open meeting and upon a public vote based on ample evidence.”
Kelleher concluded: “Wells Fargo’s actions during the cap suspension could be a real-time stress-test of their claimed management, systems and control improvements, that the Federal Reserve may want to consider in connection with its subsequent evaluation of fully removing the cap.”
Congresswoman Maxine Waters (D-Calif.), chairwoman of the House Financial Services Committee, on the other hand had requested additional information about Wells Fargo’s inquiry. “As you know, pursuant to its February 2018 consent order, the Federal Reserve restricted Wells Fargo’s growth until the firm develops and implements—and a third party independently evaluates—the governance and internal control improvements specified in the order,” Waters wrote in a letter to Jerome Powell, Chairman of the Board of Governors of the Federal Reserve System.
The House Committee on Financial Services’ ongoing oversight activities “have revealed that Wells Fargo has yet to fully satisfy the requirements of the Federal Reserve’s February 2018 consent order,” Waters continued in her letter. “[T]he Committee must know more about whether Wells Fargo requested that the Federal Reserve remove the asset cap and, if so, the Federal Reserve’s consideration of any such request.”
The Federal Reserve Board said the changes announced Wednesday “do not otherwise modify the Board’s February 2018 enforcement action against Wells Fargo. The Board continues to hold the company accountable for successfully addressing the widespread breakdowns that resulted in harm to consumers identified as part of that action and for completing the requirements of the agreement.”
Scharf concurred: “The Federal Reserve’s action does not – and should not – in any way relieve us of our obligations under the consent order. … Until our work is completed to the Federal Reserve’s satisfaction, we will continue to actively make decisions on how to allocate our balance sheet to support the needs of our customers under the existing asset cap.”