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After six-plus years under an asset cap imposed by the Federal Reserve, Wells Fargo (WFC-0.86%) is now free to expand its balance sheet, signaling a significant milestone in the bank’s recovery from past scandals.
On Tuesday, the Fed announced that it was removing the $1.95 trillion asset cap it placed on Wells Fargo in 2018 following a series of compliance failures, namely the fake-accounts scandal. The cap had effectively frozen Wells Fargo’s growth while its rivals charged ahead.
Now, Wells Fargo is free to compete on equal footing again. And Wall Street is paying attention: Shares of the bank rose by more than 2% in premarket trading on the news.
The news gives CEO Charlie Scharf, who took the reins in 2019, a symbolic (and practical) win. Under his leadership, Wells Fargo has undergone reforms — including overhauling its risk and compliance frameworks, restructuring its business operations, and revamping its management team. Scharf called the Fed’s decision “a pivotal milestone in our journey to transform Wells Fargo.
“We are a different and far stronger company today because of the work we’ve done,” Scharf said. “We are excited to continue to move forward with plans to further increase returns and growth in a deliberate manner supported by the processes and cultural changes we have made.”
Scharf, who previously ran BNY (BK-0.81%) and Visa (V-0.28%), is a protégé of JPMorgan Chase (JPM-1.03%) CEO Jamie Dimon, who has called Scharf a “first-class leader” and an “excellent” choice to take over the bank.
In a statement, the Fed said it removed the growth restriction because Wells Fargo had made “substantial progress” in addressing “its deficiencies” — including tightening internal controls, overhauling risk management, and passing a third-party checkup of its progress.
The lifting of the cap means the country’s fourth-largest bank can be more aggressive in the current competitive landscape — at a critical time in the economic cycle. Wells Fargo has been stuck in a defensive position, while the broader banking sector rode pandemic stimulus and rate hikes to fatter margins.
Now, the bank can further expand in areas such as credit cards, wealth management, and commercial banking; compete more for deposits and lending; and explore more acquisitions.
Still, despite the good news, Wells Fargo isn’t out of the regulatory woods just yet. Other elements of the 2018 enforcement order “will remain in place until the bank satisfies the requirements for their termination,” the central bank said.
The bank is still under scrutiny from the Office of the Comptroller of the Currency (OCC) and the Consumer Financial Protection Bureau (CFPB); and some lawmakers have expressed concerns that the bank hasn’t sufficiently reformed.