Wells Fargo & Co (NYSE:WFC) shares were set to open sharply lower after the bank was sent to the naughty step by the Federal Reserve.
The Central bank said that until the scandal-hit bank cleans up its act, it would not be able to boost its total assets beyond the level they were at on December 31, 2017 (around US$1,950bn), without the Fed's say-so.
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The central bank's action is unprecedented and essentially prevents Wells Fargo from writing new loans.
The Fed expressed concern over Wells Fargo's previous habit of playing fast-and-loose with its sales tactics in its retail banking operation and was also concerned over the bank's lax compliance standards.
Responding to widespread consumer abuses/compliance breakdowns by Wells Fargo, Federal Reserve restricts Wells’ growth until firm improves governance and controls. Concurrent with Fed action, Wells to replace three directors by April, one by year end: https://t.co/FJeWmTfi0d
— Federal Reserve (@federalreserve) February 2, 2018
"We cannot tolerate pervasive and persistent misconduct at any bank and the consumers harmed by Wells Fargo expect that robust and comprehensive reforms will be put in place to make certain that the abuses do not occur again," said Janet Yellen, in one of her last acts as chair of the Federal Reserve.
"The enforcement action we are taking today will ensure that Wells Fargo will not expand until it is able to do so safely and with the protections needed to manage all of its risks and protect its customers," she added.
The Fed maintained that in recent years, Wells Fargo pursued a business strategy that prioritized growth at the expense of the appropriate management of “all key risks”.
After rapping Wells Fargo across the knuckles, the Fed asked Wells Fargo to replace three current board members by April and a fourth board member by the end of the year.
WHOA: On her way out, Yellen rips Wells Fargo for consumer abuses, effectively fires 4 board members, and stops the bank from growing larger "until the firm makes sufficient improvements." https://t.co/yMDMAwBA1h
— Lydia DePillis (@lydiadepillis) February 2, 2018
The Fed set a September 30 deadline for the bank to outline reforms and have them reviewed by an outside firm.
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“We take this order seriously and are focused on addressing all of the Federal Reserve’s concerns,” said Timothy Sloan, Wells Fargo’s president and chief executive officer.
“It is important to note that the consent order is not related to any new matters, but to prior issues where we have already made significant progress. We appreciate the Federal Reserve’s acknowledgment of our actions to date. In addition, the order is not related to Wells Fargo’s financial condition -- we remain in a strong financial position and stand ready to serve the varied financial needs of our customers,” he added.
Shares in the bank were down 7% at US$59.55 in pre-market trading.
In the regular session, they shed 8.31% to US$58.74 each.