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Wells Fargo fails living wills test; slapped with even more sanctions

Another day of bad news for megabank

Lately it seems that Wells Fargo can’t even go a few days without another round of bad news. And Tuesday was another one of those bad-news days.

In September, Wells Fargo’s reputation was shattered after the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau and the city and county of Los Angeles fined the bank $185 million because more than 5,000 of the bank’s former employees opened approximately 2 million fake accounts in order to get sales bonuses.

That fine led to explosive hearings before both houses of Congress, followed by the resignation of Wells Fargo CEO John Stumpf, who took a beating at both Congressional hearings.

The scandal is far from over as Wells Fargo is still fighting off regulatory and further Congressional inquiries over the fake accounts.

The bank also lost business from several states, and then the OCC slapped additional sanctions on Wells Fargo, including forcing the bank to ask the OCC for approval if it wants to make a change to its board of directors or its senior executive officers.

The bank also reportedly failed to meet its fair lending requirements under the Community Reinvestment Act, which could land it in more hot water with the OCC.

And earlier this week, the states of California and New Jersey began investigating whether Wells Fargo’s fake account scandal also includes life insurance policies from Prudential Insurance.

Now, Wells Fargo is in more trouble with a regulator, as the Federal Deposit Insurance Corp. and the Federal Reserve Board announced Tuesday that the bank failed some of its “living will” tests and will be subject to business restrictions until the failures are remedied.

Under the Dodd-Frank Wall Street Reform Act, the nation’s largest banks are required to create a “living will,” which is a plan for the bank’s “rapid and orderly resolution under bankruptcy in the event of material financial distress or failure of the company.”

The banks are required to submit those plans to the FDIC and the Federal Reserve, and according to those two entities, Wells Fargo’s plan is not sufficient.

According to the FDIC and the Federal Reserve, Wells Fargo, Bank of America, Bank of New York Mellon, JP Morgan Chase, and State Street each had “deficiencies” in the living will plans they submitted in 2015.

The FDIC and the Federal Reserve said Tuesday that the other four banks remedied their issues, but Wells Fargo still had two outstanding issues, and will therefore be sanctioned.

From the FDIC and the Federal Reserve:

The agencies jointly determined that Wells Fargo did not adequately remedy two of the firm's three deficiencies, specifically in the categories of "legal entity rationalization" and "shared services." The agencies also jointly determined that the firm did adequately remedy its deficiency in the "governance" category.

As a result of the sanctions, restrictions are being placed on the “growth of international and non-bank activities of Wells Fargo and its subsidiaries,” the FDIC and Federal Reserve said. “In particular, Wells Fargo is prohibited from establishing international bank entities or acquiring any non-bank subsidiary,” the agencies added.

According to the FDIC and the Federal Reserve, Wells Fargo is expected to file a revised submission addressing the remaining deficiencies by March 31, 2017.

If Wells Fargo’s new plan doesn’t pass muster with the FDIC and the Federal Reserve, the agencies will limit the size of the firm's non-bank and broker-dealer assets to levels in place on Sept. 30, 2016.

From there, it gets even worse.

“If Wells Fargo has not adequately remedied the deficiencies within two years, the statute provides that the agencies, in consultation with the Financial Stability Oversight Council, may jointly require the firm to divest certain assets or operations to facilitate an orderly resolution of the firm in bankruptcy,” the FDIC and the Federal Reserve said.

In a statement, Wells Fargo said that it is “disappointed” with the FDIC and the Federal Reserve’s decision but is committed to addressing the issues identified by the regulators.

“In October 2016, Wells Fargo submitted a response to the Federal Reserve and FDIC regarding certain deficiencies cited in our 2015 Resolution Plan submission. We took feedback from our 2015 submission very seriously and took several steps to address it, including creating a program office dedicated to this effort, committing significant additional resources, and working deliberately to address these concerns,” Wells Fargo said in a statement.

“As we disclosed in our public filing in October, we believe that we substantially enhanced our capabilities in each of these areas identified. However, we were informed today that we did not adequately remediate certain deficiencies,” Wells Fargo continued.

“Wells Fargo is committed to strengthening and enhancing its resolution planning processes, and we will continue to work closely with the agencies to better understand their concerns so that we can bring our resolution planning processes in line with their expectations,” Wells Fargo concluded. “While we are disappointed with the determination issued by the agencies, we continue to be dedicated to sound resolution planning and preparedness. We believe we will be able to address the concerns raised today in the March 2017 revised submission.”

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