Wells Fargo has lost over $200 billion in market value since the Federal Reserve’s cap restriction took effect, missing out on roughly $4 billion in profits according to estimates from Bloomberg.
“The constraints of operating under the asset cap has limited our ability to offset lower rates with balance-sheet growth,” CEO Charlie Scharf told analysts last month. Net interest income fell 18% in the second quarter. “The damage might have been half that if the firm were able to expand its balance sheet,” CFO John Shrewsberry contended.
To see the cap lifted, the Mr. Scharf’s management team must present the Fed with an acceptable plan for achieving certain reforms in non-financial risk management. Once the regulator accepts that plan, a third-party review must then be completed before the Fed will remove the restriction.
The Fed had rejected the firm’s first plan, delivered almost two years ago, and Wells missed an April 2020 deadline for submitting an updated plan. Expectations are that the firm will submit its new plan some time next month. Industry executives now regard a cap on assets as the harshest weapon in the regulators’ arsenal.
They are watching closely — as are Wells investors, and Congress.
Unlike a punitive fine, representing a one-time hit to the bottom line, the cap on assets at Wells implies an indefinitely long drag on earnings. Mr. Scharf has had less than a year to get his arms around a large and complex organization. In a January earnings call — his first as CEO — Mr. Scharf indicated that his firm may take “much of this year” to review its businesses and budget. One must wonder whether he has had sufficient time to take steps to placate the Fed, where his predecessors failed.