Coverage: Fed issues rare ruling against Wells Fargo

Wells Fargo & Co detailed new regulatory restrictions imposed by the U.S. Federal Reserve on Friday that sent its shares down sharply in after-hours trading.

Pete Schroeder and Lauren Tara LaCapra of Reuters had the news:

Wells is not allowed to grow beyond the $1.95 trillion in assets it had at the end of last year “until it sufficiently improves its governance and controls,” the Fed said in a statement.

Wells Fargo estimated that the cap will cut its annual profit by $300 million to $400 million this year, as it reduces some parts of its balance sheet, like corporate deposits and trading assets, in order to continue growing core businesses. That represents 1.5 to 1.9 percent of the profit Wells generated in 2017.

The bank will also replace three board members by April and a fourth board member by the end of the year, the Fed said, without naming who they should be.

Wells Fargo shares fell 6.1 percent to $60.10 in after-hours trading.

Kevin McCoy of USA Today reported that the ruling could cut $400 million from the bank’s profit this year:

Wells Fargo says Federal Reserve sanctions on the bank after a fake accounts scandal and other problems could reduce the embattled bank’s profits by as much as $400 million this year.

The San Francisco-based bank issued the estimate after Friday’s consent order with the Fed required the replacement of four board members and restricted Wells Fargo’s financial growth.

The Fed cited “consumer abuses and compliance breakdowns,” referring to the bank’s opening of 3.5 million accounts that may not have been authorized by customers. Federal regulators and Los Angeles legal authorities in 2016 hit Wells Fargo with $185 million in penalties over the episode.

The bank has also said it would make $80 million in refunds to more than 570,000 of its auto loan customers who were charged for insurance without their knowledge. Additionally, Wells Fargo plans refunds for customers who were charged extra fees to extend rate locks on mortgages because of delays caused by the bank.

Amy Held of NPR reported that it’s the first time the Fed has placed a cap on a firm’s growth:

“Until the firm makes sufficient improvements, it will be restricted from growing any larger than its total asset size as of the end of 2017,” the Fed said in a statement. This is first time the Fed has placed a cap on the overall growth of a firm.

Wells Fargo says it has $1.9 trillion in assets.

The move to snuff its growth comes after the bank admitted in 2016 to creating potentially millions of fake bank accounts at the expense of unsuspecting customers.

NPR’s Chris Arnold has reported a “toxic high-pressure sales culture at the bank” drove workers to dupe consumers all while helping the bank’s bottom line.

The Fed said Friday that Wells Fargo’s business strategy prioritized its own growth at the expense of risk management resulting in compliance breakdowns. It is ordering the bank to “improve its governance and risk management processes, including strengthening the effectiveness of oversight by its board of directors.”