What the Wells Fargo Crackdown Signals to Corporate America

The Federal Reserve imposed penalties on Wells Fargo the other week after a cascade of problems surfaced over the last two years, ranging from opening dummy accounts in the names of customers to forcing borrowers to take out unnecessary automobile insurance.

The question is whether this is a welcome sign that regulators have not pulled back completely from policing large companies or just a one-time action on an outlier. With the Trump administration focused on easing regulation, involving other companies seems unlikely as long as they stay away from the types of egregious problems that plagued Wells Fargo.

The central bank’s order is unprecedented in the extent to which it intrudes on how the bank will be managed. It requires Wells Fargo to enhance the board’s oversight of operations, improve its risk management with an outside review of its progress and — most important — temporarily limit asset growth until its compliance issues are addressed. The Fed also announced that the bank would replace four directors this year, a statement that, although not part of the order, caused much consternation among Wells Fargo’s executives, The New York Times reported.

Although the order falls short of a takeover of the bank, it shows just how much the board had failed, in the view of its primary regulator, to meet its basic obligation to ensure that Wells Fargo is managed properly.

Banks are subject to much more exacting oversight because the federal government guarantees their deposits up to $250,000, a protection not afforded customers of other financial firms like securities and commodities brokers. With that protection, however, comes the price of being closely regulated. For example, a bank officer or director can be removed for violating the federal banking laws, including conduct that “would seriously threaten the safety and soundness of” the bank.

Even with the appointment of four new directors by the year’s end, the Federal Reserve stopped short of ordering any to step down immediately, nor was anyone in senior management identified as acting improperly.

The central bank sent letters to the former chief executive John G. Stumpf and to the former chairman Stephen W. Sanger, criticizing their performance as “an example of ineffective oversight that is not consistent with the Federal Reserve’s expectations” for a bank of its size and scope.

Wells Fargo’s attitude seems to be that the order is more of a legacy cost for past misconduct than a censure of its current operations. In a statement issued by the bank, its chief executive, Timothy J. Sloan, said: “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.”

Even the limitations on growth don’t seem to be too much of a stumbling block. Mr. Sloan said on a conference call with analysts that “we want to have this cap lifted as soon as possible, and we’re going to work very hard to make sure that’s the case.” In other words, nothing for investors to fret too much about.

Unlike banks, most corporations have little fear that a civil regulator might take actions that cost executives or directors their jobs. The Securities and Exchange Commission can seek to bar a person from serving as an officer or a director of a public company, but that requires proving the person engaged in fraud, not just mismanagement of the company.

An individual who has a controlling interest in a company that is convicted of violating federal health care fraud laws can be excluded from participating in the Medicare and Medicaid programs, effectively requiring that the person be removed from his or her position. But this provision has not been used against corporate executives who did not have any direct involvement in the criminal violations.

Wells Fargo was widely admired for how it navigated the financial crisis, coming out of it stronger than most of its competitors even after acquiring a failing bank, Wachovia, at the government’s behest in October 2008. Now a corporate culture that emphasized cross-selling products over protecting customers has made it something of a pariah, subject — at least for the moment — to more exacting oversight by the regulators.

Its competitors are unlikely to view what the Federal Reserve did as having much deterrent effect except perhaps in the short term. Other large banks will no doubt pat themselves on the back for not engaging in the types of customer abuses that put Wells Fargo in its current position. When you don’t think you’ve done anything wrong, and you believe it was just the other guy who got caught, then any penalty is unlikely to have much of an impact on your future actions.

Rather than viewing what happened to Wells Fargo as an instance of “there but for the grace of God go I,” directors and executives at other banks will more likely see it as a case of an aggressive company that crossed the line too many times. For those looking at this as a harbinger of a federal crackdown on corporate misconduct, this is more likely to be a one-off situation, with little prospect of its happening again in the current deregulatory environment.