Wells Fargo fails 'living will' test, faces restrictions: U.S. regulators

© Reuters. A man walks by a bank machine at the Wells Fargo & Co. bank in downtown Denver© Reuters. A man walks by a bank machine at the Wells Fargo & Co. bank in downtown Denver

By Dan Freed and Patrick Rucker

NEW YORK/WASHINGTON (Reuters) – U.S. officials on Tuesday limited Wells Fargo & Co’s (N:) ability to grow its business, punishing the bank for not having a sufficient plan to protect markets in the case of bankruptcy.

The ruling crowns a dismal year for the San Francisco lender roiling from a scandal in which bank employees created as many as 2 million accounts without customer authorization.

Chief Executive Officer John Stumpf resigned in the wake of that controversy. Tuesday’s ruling means the bank may not establish international bank entities or acquire non-bank subsidiaries, regulators said.

On Tuesday, regulators determined for a second time this year that the Wells Fargo “living will” fell short.

Wells Fargo is one of eight leading banks that must outline how they would be unwound in an orderly way in bankruptcy. Wells Fargo was one of five banks to fail an initial assessment in April. State Street Corp (N:), JPMorgan Chase & Co (N:), Bank of New York Mellon (NYSE:) [BKNYK.UL] and Bank of America Corp (N:) passed on Tuesday.

Wells Fargo may submit an amended living will by March 31. The restrictions may then be lifted if the Federal Reserve and Federal Deposit Insurance Corporation allow.

“We believe we will be able to address the concerns raised today in the March 2017 revised submission,” the bank said in a statement.

TOO BIG TO FAIL

Living wills were conceived in the wake of the 2008 financial crisis when the downfall of several Wall Street banks sent shockwaves through global markets.

U.S. taxpayers had to prop up banks that were deemed “too big to fail” and Congress vowed that such a rescue would not happen again.

Now that it has failed to satisfy regulators, Wells Fargo is on a regulatory path that could end with the bank being ordered to shrink in two years.

The lender will have several chances to harden its business in the meantime and avoid such a measure.

Regulators signaled that Wells Fargo’s securities and investment banking unit is an area of concern and they threatened to cap its size if Wells cannot right itself.

That business has grown increasingly important at the bank, but still accounts for just a fraction of total revenues.

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