Wells Fargo, once one of the most formidable players in the U.S. banking sector, now faces another regulatory setback, further complicating its efforts to emerge from a long-standing compliance crisis. The recent regulatory rebuke concerning the bank’s insufficient efforts to combat money laundering is a blow to its ongoing struggle to restore credibility after the notorious 2016 fake accounts scandal. Analysts believe this latest development could prolong a significant penalty the bank has been grappling with for years—the asset cap imposed by the U.S. Federal Reserve, which has severely limited its ability to grow.

Despite strides in fixing issues linked to the fake accounts scandal, Wells Fargo’s compliance failures suggest that its long-term cleanup efforts are far from complete. The repercussions of this latest action highlight broader systemic failures at the bank, reflecting the persistent challenge of aligning its practices with regulatory expectations. In an environment where regulatory oversight is tightening, this renewed scrutiny casts doubt on the timeline for resolving the asset cap and calls into question the bank’s long-term growth prospects.

Background: The Fake Accounts Scandal and Its Fallout

Wells Fargo’s current woes can be traced back to the 2016 revelation that the bank had opened millions of fake accounts without customers’ knowledge or consent. This scandal rocked the financial world and triggered widespread regulatory scrutiny, leading to the imposition of several penalties. Among the most significant was the Federal Reserve’s decision to impose an asset cap in 2018, limiting Wells Fargo’s ability to grow its balance sheet until it adequately addressed the underlying issues in its corporate culture and governance.

The asset cap, set at $1.95 trillion, restricts the bank’s ability to increase its total assets, effectively curtailing its potential to expand its deposit base or grow its trading operations—two key growth areas for major financial institutions. Wells Fargo has been working under this cap for several years, and analysts expected that a resolution could be on the horizon, especially after the bank made some progress in addressing its sales practice issues earlier this year.

However, the new regulatory order from the Office of the Comptroller of the Currency (OCC) has cast a shadow over those expectations.

The Latest Blow: Anti-Money Laundering Failures

On Thursday, the OCC announced restrictions on Wells Fargo’s ability to expand into riskier business ventures after determining that the bank had insufficient safeguards in place to prevent money laundering and other illegal transactions. This order stipulates that Wells Fargo must now seek approval from the OCC before introducing riskier products or services. Moreover, the bank is required to submit detailed risk assessment plans for even less risky offerings and provide a comprehensive action plan to address these issues.

While the OCC did not impose a fine, the symbolic and operational weight of this decision is significant. Wells Fargo had resolved a previous consent order related to anti-money laundering (AML) in January 2021, after years of effort and significant expense. The bank had hoped that this resolution would close a critical chapter in its regulatory journey. However, the latest developments suggest that Wells Fargo’s compliance issues run deeper than previously acknowledged.

“This is very surprising given that Wells Fargo had resolved a consent order for anti-money laundering quite recently, in January 2021, after many years of work and expense,” remarked Vivek Juneja, an analyst at JPMorgan Securities, in a note.

A Setback in the Bank’s Regulatory Cleanup

The OCC’s actions highlight the continuing struggles Wells Fargo faces in meeting regulatory expectations across multiple dimensions. Analysts had viewed Wells Fargo’s recent progress in addressing past wrongdoings as a positive step toward lifting the asset cap, a move that could have unlocked significant growth potential for the bank. In February, the OCC lifted a 2016 consent order related to the bank’s sales practices, a major milestone that many believed could pave the way for the Federal Reserve to lift the asset cap later this year.

However, the latest regulatory rebuke has changed that outlook. Piper Sandler analysts described the OCC’s decision as “an unfortunate but not shocking step back in what had otherwise been good forward progress this year on resolving regulatory concerns.” The incident underscores the precariousness of Wells Fargo’s position in the regulatory landscape, where each step forward can easily be met with another step back.

Implications for the Asset Cap Timeline

The asset cap has long been a thorn in Wells Fargo’s side, restricting its ability to grow and compete on an even footing with its peers. Federal Reserve Chair Jerome Powell has stated that the cap will remain in place until Wells Fargo demonstrates comprehensive reforms to address the issues highlighted by the fake accounts scandal and other compliance failures. The bank still has eight active consent orders with various regulators, covering a wide range of issues from risk management to consumer protections.

KBW analysts led by David Konrad remarked, “It adds uncertainties to the timeline of the asset cap and their expense outlook.” This uncertainty is a critical issue for Wells Fargo, as the cap continues to limit its ability to bring in more corporate deposits or expand its trading operations—two avenues that are crucial for driving profitability in the highly competitive banking sector.

The prolonged imposition of the asset cap also has implications for Wells Fargo’s ability to keep pace with its competitors. While the broader S&P 500 bank index has jumped 15% this year, Wells Fargo’s stock has only risen 7%, reflecting the ongoing challenges the bank faces in regaining investor confidence.

Broader Concerns: Wells Fargo’s Systemic Issues

For analysts, the latest compliance failure is more than just a temporary setback; it raises broader questions about Wells Fargo’s ability to rectify the deep-seated issues within its operations. As Jefferies analysts noted, “We still do not have a clear view of when asset-cap removal would come in any event, much less if additional actions like today’s could alter the path further.” This uncertainty clouds the bank’s future, making it difficult for investors and regulators alike to gauge when Wells Fargo will finally be free of its regulatory shackles.

The fact that Wells Fargo is once again facing regulatory scrutiny over AML issues—despite having resolved a consent order related to the same issue just two years ago—suggests that the bank’s internal controls and compliance mechanisms may still be inadequate. This is particularly concerning given that Wells Fargo has been working under heightened regulatory oversight for nearly a decade now.

Moreover, the bank’s CEO, Charlie Scharf, who took over in 2019, has been tasked with managing the fallout from the 2016 scandal and guiding the institution through its regulatory cleanup. While Scharf has made significant progress, the latest developments suggest that his work is far from over.

The Road Ahead for Wells Fargo

As Wells Fargo grapples with its latest regulatory challenge, the road ahead appears increasingly complicated. The bank’s ability to grow and compete in key business areas remains constrained by the asset cap, and the recent AML-related failures suggest that Wells Fargo still has substantial work to do to meet regulators’ expectations.

The fresh compliance problems not only delay the prospect of removing the asset cap but also signal to investors and regulators that Wells Fargo’s path to recovery is far from assured. The bank’s leadership, particularly CEO Charlie Scharf, faces the dual challenge of maintaining momentum in fixing long-standing issues while addressing new ones as they arise.

In conclusion, Wells Fargo’s regulatory woes continue to mount, with no clear end in sight. The bank’s ability to navigate these challenges will determine its future trajectory, both in terms of growth potential and its standing within the broader financial industry. For now, the asset cap remains firmly in place, and Wells Fargo must continue to tread carefully in its interactions with regulators.

(Adapted from USNews.com)