Wells Fargo gets Fed nod for overhaul plan

Wells Fargo & Co. has taken a significant step forward in its three-year quest to satisfy a Federal Reserve order that triggered a costly cap on the bank’s growth.

Fed officials have privately signaled to the scandal-ridden lender that they accept its proposal for overhauling risk management and governance, according to people with knowledge of the matter. Chief Executive Charlie Scharf’s team submitted the revised plan -- thousands of pages long -- in September, after his predecessors stumbled in clearing what turned out to be a surprisingly high hurdle.

The Fed nod marks the company’s most meaningful progress yet in addressing lapses that prompted the central bank to impose an unprecedented cap on the bank’s assets, limiting it to its size at the end of 2017. Winning acceptance is the second of four steps toward getting the sanction lifted.

Still, much work remains for the San Francisco-based company to move beyond its scandals. A number of top executives privately expect Wells Fargo won’t escape the asset cap until late this year at the earliest, while key Fed officials see the process dragging into 2022 or beyond, Bloomberg reported in December.

Representatives for Wells Fargo and the Fed declined to comment on whether the plan has been accepted. Under Scharf, the bank has refused to provide an estimate for when it might satisfy the regulator.

“The Federal Reserve will determine when the work to fulfill the requirements of the consent order is done to their satisfaction,” a Wells Fargo spokesperson said in an emailed statement. “We are focused on doing the work. We maintain strong levels of liquidity and capital, and we are committed to using our financial strength to help support the U.S. economy and our clients while operating in compliance with the asset cap.”

The Fed’s cap has dragged on Wells Fargo’s shares since it was imposed in early 2018, and has cost the fourth-largest U.S. lender billions of dollars in profits that it could have generated had it simply grown at the pace of the industry.

Scharf, who took the helm in late 2019, has made satisfying regulators his top priority, a key step toward pursuing other elements of his strategy. The shares have soared since late October, with some investors speculating the Fed would soon lift the asset cap.

Wells Fargo shares surged as much as 7.7% Wednesday to their highest level in almost a year after Bloomberg reported Fed officials’ acceptance.

But the road ahead remains long. To get the cap removed, executives must submit plans to bolster board effectiveness and risk management, get those plans approved by the Fed, adopt and implement the plans and undergo a third-party review that could take months. Following that, the full Fed board will have to agree to end the sanction.

The asset cap, Janet Yellen’s final act as Fed chair, is now seen as the harshest tool in the regulators’ arsenal short of forcing a lender out of business. It bit harder last year by limiting Wells Fargo’s ability to finance clients and counter lower interest rates with balance-sheet growth.

When the restriction was first imposed in 2018, Wells Fargo executives publicly predicted the firm would satisfy the requirements by the end of that year. They later extended that timeline twice, then threw out the guidance entirely.

Scharf and his leadership have adopted a cautious tone, emphasizing that much work remains, in an effort to avoid raising expectations or antagonizing the regulator.

“I do believe that we’re making progress,” Scharf said on a conference call last month. “But if you look at the words that are required in the consent order, they’re really clear, which is execute and implement that, and we’ve got significant work to do.”(Updates with share movement in eighth paragraph.)

[More: Now that Wells Fargo has a plan, what’s in it for advisers?]