Feds slap restrictions on Wells Fargo after finding bank unprepared for any future bankruptcy

Wells Fargo & Co. was sanctioned Tuesday by federal regulators who determined the bank has not done enough to ensure it could continue operating smoothly and without a taxpayer bailout after a bankruptcy.

In the wake of the financial crisis, regulators required the nation’s largest banks to come up with detailed bankruptcy plans — also called “living wills” — in case they fail, hoping to avoid the chaos caused by the collapse of investment bank Lehman Bros. in 2008.

The Federal Reserve Board and Federal Deposit Insurance Corp. on Tuesday signed off on the living wills of JPMorgan Chase, Bank of America and other big banks. But it said Wells Fargo — which is still grappling with fallout from its fake-accounts scandal — fell short.

That decision did not reflect the current financial health of the $1.9-trillion institution, which is well-capitalized and reaped a third-quarter profit of $5.6 billion. But it was rather a determination that if the economy were to go into a sharp decline and Wells Fargo were to go bankrupt, its operations could not quickly or easily be broken up or sold off.

In a letter to Wells Fargo Chief Executive Tim Sloan, regulators said the bank’s plan did not do enough to simplify the company’s legal structure in the event of a bankruptcy and did not address how different parts of the bank could function independently if the parent company did not exist and was not able to provide support services.

Regulators chided the bank for failing to provide enough detail and noted that in one case the bank promised only to do “additional research” and “further assessment.” The company operates more than 80 subsidiaries and funds in the United States and in at least eight foreign countries, according to FactSet.

The bank must submit a revised plan by March 31. Until then, Wells Fargo has been prohibited from establishing new international banking businesses or buying any nonbank subsidiaries, a category that includes various entities such as wealth advisory firms. If it does not submit a revised plan by the new deadline, or if its revised plan does not pass muster, the bank could face additional sanctions, including caps on the size of some of its businesses.

In a statement, the bank said it would work with regulators to address their concerns.

“While we are disappointed with the determination issued by the agencies, we continue to be dedicated to sound resolution planning and preparedness,” the bank said. “We believe we will be able to address the concerns raised today in the March 2017 revised submission.”

Sen. Sherrod Brown (D-Ohio), the top Democrat on the Senate Banking Committee, said the sanctions against Wells Fargo show the necessity of rules aimed at reining in big banks. He and other Democrats are concerned that the incoming administration will make good on President-elect Donald Trump’s pledge to dismantle much of the Dodd-Frank Wall Street Reform Act, the law that calls for banks to prepare living wills.

“Even one too-big-to-fail bank is too many, and we need watchdogs that will continue to impose tough rules and strong penalties to make banks simpler and safer, not the opposite,” Brown said.

Regulators in April had rejected the living wills of most of the nation’s big banks, including Wells Fargo. This time around, though, Wells Fargo stands alone, which is notable because of Wells Fargo’s reputation as being a plain-vanilla bank compared with its peers, said Jaret Seiberg, an analyst with investment firm Cowen & Co.

“This failure is likely to garner attention in Washington because Wells Fargo is generally seen as one of the less complex of the mega banks,” Seiberg wrote in a note to investors Tuesday. “Yet all the other mega banks were able to devise plans to simplify their structure that were able to win supervisory approval.”

For the last three months, the bank has been gripped by a still-growing scandal over revelations that its employees, motivated by poorly structured incentives, opened as many as 2 million bank and credit card accounts for customers without authorization. Those practices, first uncovered by a 2013 Times investigation, led to a $185 million settlement with regulators in September.

The settlement sparked outrage from lawmakers and has led a handful of state and city agencies to cut business ties to the bank. It also led to the resignation of CEO John Stumpf, who retired in October and was replaced by Sloan.

As the bank prepares to amend its living will yet again, it is still dealing with a slew of investigations from federal and state agencies, including the Securities and Exchange Commission, the Department of Labor and the California Department of Justice.

On Monday, state insurance officials in California and New Jersey said they, too, would investigate the bank after New Jersey insurer Prudential said it would stop selling life insurance policies through Wells Fargo over concerns that bank workers might have opened policies for unsuspecting consumers just as they opened unauthorized accounts.

The bank is also under increasing regulatory pressure.The Office of the Comptroller of the Currency last month added a level of regulatory oversight for the bank, requiring it to seek the agency’s approval for certain executive hires and other business decisions.

The Office of the Comptroller of the Currency is also reportedly mulling a downgrade of the bank’s Community Reinvestment Act rating, which judges how well banks serve poor and minority communities. A rating downgrade could further harm the bank’s reputation and make acquisitions difficult.

Seiberg of Cowen said although the living will and other regulatory issues are not directly related to Wells Fargo’s account-sales scandal, the furor makes it more likely that regulators will take a hard line with the bank.

“This result is indicative of what we expect Wells Fargo to face in Washington over the coming year,” he wrote. “The pressure is to be tough on Wells Fargo and not let anything fall through the cracks.”

The living-will announcement came after markets closed Tuesday. Wells Fargo shares were down less than 1% at $55.49 in after-hours trading.

james.koren@latimes.com

jim.puzzanghera@latimes.com

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UPDATES:

5:55 p.m.: This article was updated with comments from investment analyst Jaret Seiberg and more details on the Wells Fargo scandal involving unauthorized accounts.

3:30 p.m.: This article was updated with more details about the sanctions, a comment from Wells Fargo and additional background.

This article was originally published at 2:10 p.m.