US banking giant Wells Fargo has the capacity to provide about $384 billion of additional loans to small and medium-sized businesses (SMEs) and individuals, which is especially relevant during the corona crisis. However, the bank can’t help customers because of the asset cap imposed by the Federal Reserve (Fed).
Wells Fargo Asks Fed to Remove the Cap
The US has reported the most cases of coronavirus, and it seems the economic crisis is about to get even worse. President Donald Trump warned of the upcoming “very painful weeks,” while JPMorgan told investors that the stock market hasn’t bottomed out yet. In light of this, Wells Fargo could potentially help customers through its loans. However, it cannot unleash the funds because the Fed had previously imposed an asset cap.
Specifically, the central bank mandated Wells Fargo to keep its assets below $1.95 trillion. The Fed’s decision came in response to the bank’s fake account scandal. For years, Wells Fargo abused its clients by creating fake accounts on behalf of customers and forging documents.
Last week, the bank asked the Fed to remove the cap at least temporarily and let it support people and businesses during the crisis. People familiar with the matter told Bloomberg that the Fed didn’t feel Wells Fargo was ready.
While the bank hired a new CEO last year and announced massive restructuring, the Fed officials are skeptical about its potential to address regulatory concerns.
Wells Fargo didn’t clarify on the matter, but said in a statement:
While we cannot comment on regulatory matters, Wells Fargo is focused on satisfying the requirements of the consent order. During these challenging times, we are very focused on doing all we can for our clients while operating under the constraints of the asset cap.
The Fed’s skepticism shows how much in trouble the bank really is. The central bank has been calling major banks to boost lending at the expense of whatever excess cash they have in an effort to support the economy amid the crisis. Together, the biggest banks have enough capital to increase lending by $1.6 trillion.
We May Know Fed’s Position in Coming Days
The Fed imposed the cap in February 2018. At the end of 2019, Wells Fargo had only $24 billion free room to that level. Given that deposits are flowing in, the company has probably reached that limit and cannot lend any more.
Ironically, Wells Fargo has the most firepower among biggest US banks. The problem is that it cannot use the capital because of the Fed’s limit.
In any case, this is a difficult situation for the Fed, who has to maintain its role as a strict regulator of biggest banks on the one hand and boost liquidity amid the crisis on the other hand. Despite the economic collapse, the central bank doesn’t want to let Wells Fargo escape the sanction.
However, the Fed hasn’t provided any official comment yet. We may find more details about the situation in the coming days. Last Saturday, Maxine Waters, the head of the House Financial Services Committee, asked Fed Chair Jerome Powell to disclose more information on Wells Fargo’s request and what the central bank might be up to. Waters expects a briefing later this month.
Wells Fargo’s current CEO, Charlie Scharf, succeeds two previous CEOs who tried to fix the scandal but left the bank in a worse situation by frustrating regulators. Politicians and regulators accused the bank of failing to act promptly. Scharf is the first outsider among recent CEOs. He has taken even more radical measures to restructure the bank.
Nevertheless, Wells Fargo was the bank that last year prevented its customers from purchasing cryptocurrency with their own funds, citing “multiple risks associated with this volatile investment”. And now they are the bank with a forced asset cap due to mismanaging its 401k plan investments.
Do you think the Fed will allow Wells Fargo to lend using the excess funds? Share your thoughts in the comments section!
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