Wells Fargo (WFC 2.87%) management has been dealing with a ton of regulatory issues ever since the top-tier bank's phony-accounts scandal came to light in 2016. That was when employees at the bank created thousands of depository and credit card accounts without the consent of customers.
The most consequential of all these regulatory issues has been the asset cap the Federal Reserve placed on the bank in early 2018, which essentially prevents the bank from growing its balance sheet. The cap has cost the bank billions of dollars in potential profits and remains the top obstacle to the bank earning a much higher valuation and stock price appreciating.
Image source: Wells Fargo.
There were further ups and downs on the regulatory front this year, but Wells Fargo has recently received some rather positive regulatory news. Let's take a look at the two recent pieces of news and how they both affect the bank.
1. Wells Fargo now operates under a lower G-SIB bucket
Banks have lots of regulatory capital requirements, but a big ratio that regulators watch closely is the common equity tier 1 (CET1) capital ratio, which is a measure of a bank's core capital expressed as a percentage of risk-weighted assets. Most banks have a 4.5% minimum CET1 ratio as well as a stress capital buffer.
But the largest and most global banks, known as global systemically important banks (G-SIB), also have another capital buffer requirement that is determined based on a bank's size and how connected it is to the global financial system. The Financial Stability Board (FSB), in tandem with the Basel Committee on Banking Supervision (BCBS), once again placed Wells Fargo in the lowest bucket, suggesting only an additional 1% G-SIB buffer be added onto Wells Fargo's CET1 ratio.
Meanwhile, JPMorgan Chase (JPM 0.79%), Citigroup (C 1.61%), and Bank of America (BAC 2.81%) are all in higher buckets.
Global regulators like FSB and BCBS don't make the final G-SIB rulings. The Fed makes these calculations and usually requires a larger G-SIB buffer. But considering that several members of the Fed are on FSB, Odeon Capital analyst Dick Bove thinks this is good news. Following the news, he upgraded Wells Fargo stock from a hold to a buy.
"Since the bank has the best rating that the FSB provides; this rating raises the issue as to whether the U.S. regulators should consider eliminating their strictures on the bank -- i.e., eliminate the asset cap requirement," Bove wrote in a research note.
I was a little surprised to see this note from Bove, largely because part of the reason Wells Fargo might be seen as less risky by regulators is due to the fact that it can't really grow its balance sheet right now. Analysts have also written before that they expect the asset cap to be removed soon, which of course hasn't happened yet.
Trying to predict the exact removal of the asset cap is very difficult at this point, because there is a set process that Wells Fargo has to complete before getting the cap removed, and it's just hard to know exactly how long it will take. The bank will likely need to see a good number of its consent orders removed before the Fed thinks about removing the cap. But the fact that regulators continue to view Wells Fargo as a lower-risk G-SIB is certainly good news.
2. Jerome Powell was reappointed as Fed chair
The other somewhat recent good news for Wells Fargo is the fact that President Joe Biden reappointed Jerome Powell as chairman of the Federal Reserve. The Fed specifically imposed the asset cap in 2018, and the Federal Reserve Board of Governors must approve the lifting of the asset cap. There's no guarantee that things will be easy under Powell, who, earlier this year, said publicly that progress at Wells Fargo is being closely watched by the Fed, and that the Fed would not hesitate to act if the bank fails in this regard.
In September, the U.S. Office of the Comptroller of the Currency, which regulates national banks, fined Wells Fargo $250 million for essentially taking too long to fix a previous consent order. This was not related to the asset cap, but it shows that the bank is not out of the woods yet.
Still, getting the asset cap removed will probably be easier under Powell than under the person who was considered Biden's other potential choice, Dr. Lael Brainard. Biden appointed her as vice chairwoman of the Federal Reserve Board of Governors.
Brainard was the favored pick of Sen. Elizabeth Warren (D-Massachusetts), who has long railed against big banks and not too long ago called for regulators to break up Wells Fargo. In the past, Brainard has called for tougher regulations for banks and pushed for higher capital requirements.
Again, this may not push the timeline up too much on the asset cap, but Wells Fargo investors (or would-be investors) have got to take the little victories when you can get them.
