Wells Fargo & Co.’s unprecedented punishment that bans it from growing seems at odds with the pro-business agenda that is sweeping through Washington under President Donald Trump.
But some analysts were quick to point out that the Federal Reserve’s aggressive enforcement action against the scandal-ridden bank -- announced after markets closed Friday -- shouldn’t be taken as a sign that regulators are getting cold feet about rolling back rules.
“No one should conflate regulation with enforcement,” said Ian Katz, an analyst at Capital Alpha Partners LLC in Washington. “There’s a deregulatory effort that is going on and it is going to continue.”
By Monday, investors seemed to conclude that Wells Fargo’s pain was unique to Wells Fargo. It fell as much as 10.3 percent in New York trading, while big rivals such as JPMorgan Chase & Co. and Citigroup Inc. slipped more in-line with the slumping stock market. Winds at banks’ backs include the massive tax cut that just passed Congress and the fact that officials appointed by Trump are increasingly populating the Fed and other agencies that regulate Wall Street.
Even Trump himself has argued that his determination to cut back red tape doesn’t mean his administration will go soft on banks accused of wrongdoing. In a December tweet he wrote: “Fines and penalties against Wells Fargo Bank for their bad acts against their customers and others will not be dropped, as has incorrectly been reported, but will be pursued and, if anything, substantially increased. I will cut Regs but make penalties severe when caught cheating!”
While the blow to Wells Fargo has been widely characterized as Janet Yellen’s parting shot atop the Fed, Jerome Powell, who took over as chairman Monday, was heavily involved in the decision to punish the bank for abuses such as opening millions of accounts without customers’ permission.
Powell was in charge of the central bank’s regulatory portfolio for several months last year after former Governor Daniel Tarullo stepped down in April. In October, Powell did cede Wall Street oversight to Randal Quarles, the Fed’s first-ever vice chair of supervision. But Quarles couldn’t participate in negotiations with Wells Fargo because family ties have prompted him to recuse himself from all matters tied to the lender.
That left Powell as the top policy maker overseeing discussions between Fed staff and the embattled bank. The vote to sanction Wells Fargo was 3-0 with Yellen, Powell and Fed Governor Lael Brainard all supporting the decision.
Quarles, meanwhile, has been busy laying the ground work for easing rules.
In a speech last month, the former executive at private-equity titan Carlyle Group LP, said constraints he’s targeting include the leverage ratio -- a post-crisis requirement that led to dramatically increased capital levels at the biggest banks. Quarles also said he wants to revise Volcker Rule trading restrictions and make annual stress tests of banks less burdensome.
Powell has indicated he supports taking a fresh look at regulations, just as he’s shown he will come down on banks that break the rules, said Capital Alpha’s Katz.
“I think the folks at the Fed including Powell clearly see the distinction between easing regulations like the supplementary leverage ratio and punishing a bank that has abused its customers,” Katz said.
The Fed’s sanction prohibits Wells Fargo from growing until it convinces authorities it’s addressing its shortcomings. Cowen & Co. analyst Jaret Seiberg said the harsh Wells Fargo penalty could even help the deregulatory push by giving the Fed and other agencies “political capital” to dial back some of the tough strictures imposed on Wall Street after the 2008 financial crisis.
In his reaction to the Wells Fargo punishment, Sherrod Brown, the top Democrat on the Senate Banking Committee, showed he’s still very concerned that Trump’s appointees will remove shackles from lenders.
“Scandals at Wells Fargo demonstrate why Congress and the new leadership at the Fed shouldn’t weaken rules for Wall Street,” the Ohio senator said in an emailed statement.
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