Wells Fargo on Sunday closed its loan window tied to the Small Business Administration's Paycheck Protection Program (PPP), saying its ability to help small businesses affected by the coronavirus pandemic is limited by a 2018 asset cap set by the Federal Reserve.
The cap was instituted by the regulator in response to the bank’s consumer abuses — most notably, a 2016 fake-accounts scandal — prevents the bank from holding assets more than the $1.95 trillion it had at the end of 2017.
- The bank said it would lend up to $10 billion as part of its participation in the U.S. government's $350 billion small-business relief program, but it expects the number of applications it has already received "will fill the company’s capacity to lend under the program," Wells Fargo said on its website.
Wells Fargo was among a number of big U.S. banks, including Citi, PNC, Capital One and Truist, that were delayed in processing applications Friday, when the PPP debuted. The nation's largest bank, JPMorgan Chase, opened its application portal around 1 p.m. ET Friday. The lag came as banks scurried to institute guidance issued late Thursday by the Small Business Administration (SBA).
Wells Fargo opened its portal Saturday, according to the San Francisco Business Journal. The bank said it would focus on serving nonprofits and small businesses with fewer than 50 employees. But it quickly estimated that it would hit capacity.
"While we are actively working to create balance sheet capacity to lend, we are limited in our ongoing ability to use our strong capital and liquidity position to extend additional credit," Wells Fargo CEO Charlie Scharf said in a statement Sunday. "We are committed to helping our customers during these unprecedented and challenging times, but are restricted in our ability to serve as many customers as we would like under the PPP."
The San Francisco-based bank reached out to the Federal Reserve to ask that its asset cap be lifted so that it can better serve businesses and customers hurt by the coronavirus outbreak, Banking Dive reported last month.
But sources told Bloomberg the Fed was reluctant to ease or lift the cap because the bank has yet to fully address the regulator’s concerns.
The Fed said it instituted the cap to restrict the bank’s growth until it "sufficiently improves its governance and controls." But some experts say it would not be unusual for the regulator to lift the cap at this time.
“It is very possible that the Fed will lift the asset cap on Wells Fargo,” Mayra Rodriguez Valladares, a capital market consultant and trainer who works with banks on risk and management issues, told Banking Dive. “It should not unless Wells Fargo can show that it really has improved internal controls given its record of consumer abuses.”
If the regulator decides to lift the cap, the bank should be required to submit weekly data on the exact amount of loans it approves and disburses to individuals and small businesses, she said.
"Intense supervision is required of Wells Fargo to make sure that it is indeed fulfilling a critical mission to individuals and companies adversely impacted by COVID-19," Valladares said.
Allen Sukholitsky, chief macro strategist at Xallarap Advisory, said a Fed decision to lift the cap is "well within the realm of possibility."
"Moral hazard and unintended consequences have plagued Federal Reserve policy for decades," he told Banking Dive. “If the Federal Reserve can selectively establish swap lines with foreign central banks and backstop the municipal market, then supporting one of America's largest banks would come as no surprise.”
Scharf made clear in January, during his first quarterly earnings call as CEO, he is prioritizing resolving the bank’s regulatory issues. He reiterated that commitment Sunday, emphasizing that the actions that spurred the Fed to impose the cap were brought on by a previous C-suite.
"Since I arrived at the company, I have been clear that we will direct all resources necessary to do the work required by our regulators and we are in the process of doing so," Scharf said Sunday. "Today, the company continues to operate in compliance with an asset cap imposed by its regulator due to actions of past leadership."
Members of Congress took two Wells Fargo board members to task at a hearing last month. Rep. Nydia Velázquez, D-NY, accused Betsy Duke and James Quigley of being more concerned with lifting the cap than fixing management issues.
"The priority of the two of you and the overall focus of the board was on lifting the asset cap and exiting the consent decree and not actually fixing the risk management problems at the bank or holding senior management accountable," she said.
Duke and Quigley resigned days later.