By Jeff Bater
Sept. 20 — The Office of the Comptroller of the Currency is conducting an industry-wide examination of how banks pitch products to consumers in response to the bogus-account scandal at Wells Fargo.
Examiners have been directed to “review the sales practices of all the large and midsize banks the OCC supervises” to determine whether the tactics used by Wells Fargo are unique or used by some its peers, Comptroller of the Currency Thomas Curry said in testimony to the Senate Banking Committee.
“That really will be the focus of our horizontal review. Banks are under enormous margin pressure. And that could be a bad environment,” Curry told senators.
Wells Fargo agreed to pay $185 million — including $35 million to the OCC — after acknowledging that its employees secretly opened more than 2 million unauthorized accounts to hit sales targets.
The OCC, which began receiving complaints about Wells Fargo in 2012, will also conduct “a post-mortem” to identify potential gaps in its supervision, Curry said.
The appearances by Curry and Consumer Financial Protection Bureau Director Richard Cordray lacked the sharp questions lawmakers earlier leveled at Wells Fargo CEO John Stumpf.
Banking Committee Chairman Richard Shelby (R-Ala.) was the only Republican to stay for the second panel and question the two regulators, who appeared alongside James Clark, Chief Deputy, Office of the Los Angeles City Attorney, the office which first launched the investigation of Wells Fargo’s aggressive tactics.
Nevertheless, Curry and Cordray provided hints of how the Wells Fargo investigation is likely to impact the bank and ripple more widely across the banking industry.
In earlier exchanges with Stumpf, senators questioned whether the investigation provides new evidence that the nation’s megabanks are too large to manage themselves effectively.
“You've said multiple times here that 5,300 people went, and that's basically one percent of your workforce,” Sen. Jon Tester (D-Mont.) said, referring to the number of employees the bank has fired over aggressive sales. “Every time you say that, you give ammunition to the folks who want to break up the big banks.”
David Vitter (R-La.) asked, “Is it normal for one percent of a business unit to be fired over fraud, not high turnover, not incompetence, fraud and this never is mentioned to you?”
After Stumpf replied by saying, “if I could go back, I would have, you know, spent more time on this,” Vitter said, “Why isn't this crystal-clear proof that an entity as big as Wells is not only too big to fail but it's too big to manage and it's too big to regulate? One percent of a big part of your business is fired over fraud but that doesn't rise to your level?”
Jaret Seiberg, an analyst with Cowen and Company, said the market underappreciates the risk that Congress over the next few years may take steps to restructure or break up the biggest banks. “The argument will be that Wells Fargo was supposed to be the gold standard and even it was too big to be properly overseen by its board,” Seiberg wrote in a Sept. 20 research note after the Senate hearing.
Each year, the Federal Reserve performs stress tests and conducts a capital review of the biggest banks. Seiberg suggested Wells Fargo might face a higher hurdle in the 2017 testing, which could limit its ability to distribute as much capital as the market expects.
“What is clear to us is that the Wells Fargo controversy embarrassed the regulators,” Seiberg said. “And that generally means that regulators get tougher in their reviews and give banks less benefit of the doubt during exams. That means more headaches and costs for the banks.”
George Washington University Law School Professor Arthur E. Wilmarth, Jr., said the controversy revives questions about whether some institutions are too large to handle – either by themselves or regulators.
“Is it really possible to manage institutions of this size and scope without having these kinds of breakdowns in compliance and culture?” Wilmarth said in a Sept. 20 telephone interview with Bloomberg BNA. “And is it really possible to regulate those institutions in a rigorous way that prevents such breakdowns?”
That’s especially relevant, he said, given that the two banks caught up in the most recent high-profile controversies JPMorgan and the “London Whale” episode, and now Wells Fargo – are widely viewed as the best of the megabank class, he said.
“However, based on the `London Whale’ episode at JPMorgan Chase and the recent scandal at Wells Fargo, it’s hard to resist the conclusion that these financial giants are not just too big to fail but also too big to manage or regulate effectively,” Wilmarth said.
--With assistance from Chris Bruce.
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