The Federal Reserve had ordered Wells Fargo on Friday to halt its growth until it fixes the systemic compliance problems that led to consumer abuses, in an unprecedented move that saw the lender's shares fell sharply in after hours trading.
The Federal Reserve Board said in a statement that it would restrict the growth of Wells Fargo, the country's third-largest lender with $1.95 trillion in assets as of the end of 2017, "until it sufficiently improves its governance and controls’’.
The bank will also replace three current board members by April and a fourth board member by the end of the year, the Fed said, without naming who they should be.
Regulators have rarely intervened directly in a bank’s operations in the past, and it is unprecedented for the Fed to order a bank to stop growing altogether, officials said. The central bank said Wells Fargo’s aggressive business strategy prioritised growth over effective risk management, leading to serious compliance breakdowns.
Wells Fargo stock fell to $60.05 in after-hours trading, down about $4 or 6 per cent from its afternoon close.
“We take this order seriously and are focused on addressing all of the Federal Reserves concerns,’’ said Timothy Sloan, Wells Fargos president and chief executive officer, in a statement.
“It is important to note that the consent order is not related to any new matters, but to prior issues where we have already made significant progress, he added.
Wells Fargo's balance sheet grew steadily from the end of 2013 to 2016, but growth slowed dramatically last year as it battled to address the issues raised by the scandal.
Under the terms of the order, Wells Fargo must average $1.95 trillion in assets over any two-quarter period, which Fed officials said would allow the bank to continue its normal operations while halting expansion.
The bank must submit a plan within 60 days outlining how it plans to address the Fed’s concerns and will engage independent third parties to conduct a review by September to confirm the bank has made the necessary improvements.
The growth halt will be in place until this review, which will be led by the San Francisco Fed and top regulatory officials in Washington, has been completed to the Fed’s satisfaction, the Fed said.
“We cannot tolerate pervasive and persistent misconduct at any bank, said Chair Janet Yellen in a statement on her final day as leader of the central bank.
The Fed action follows persistent compliance issues at Wells Fargo which had agreed to pay $190 million in September 2016 to settle charges it created millions of phony customer accounts. The scandal led to the exit of several top bank executives, including its then-CEO, John Stumpf, who retired one month later.
While regulatory intervention in a banks operations and corporate governance has been rare, the Federal Deposit Insurance Corp and the Office of the Comptroller of the Currency gave orders to Bank of America Corp and Citigroup Inc, which received massive bailouts during the 2007-2009 financial crisis, regarding their business plans and boards of directors, the Wall Street Journal reported at the time.