OCC adds new guardrails to review of largest US banks

The OCC said in a statement Thursday that the guardrails are included in an appendix updating of its Bank Enforcement Actions and Related Matters manual.

Although the OCC doesn’t cite any specific banks, analysts point to Wells Fargo & Co. when interpreting the statement that the new policy “is focused on larger and more complex banks the OCC supervises.”

The OCC said Appendix C “provides greater transparency and clarity about how the OCC determines if a bank has persistent weaknesses and the possible additional actions the agency may take to address them.

“This revised policy promotes strong management by making clear that a bank’s inability to correct persistent weaknesses will result in proportionate, fair and appropriate consequences, including growth restrictions and divestitures when warranted,” Michael Hsu, acting head OCC official, said in a statement.

“These guardrails are especially important today, as banks grow to better serve their communities, improve their competitiveness and achieve economies of scale,” Hsu said. “Well-managed banks provide invaluable support to our economy, and this revised policy promotes this result.”

Wells Fargo has been operating under the shadow of a $1.93 trillion asset cap by the Federal Reserve Board since Feb. 3, 2018.

The asset cap represents the highest profile of several regulatory restrictions and fines that Wells Fargo has experience since its customer account scandal erupted publicly in September 2016.

In April 2022, Wells Fargo chief executive Charlie Scharf said it could be several more years before the bank resolves enough legal and regulatory issues to be allowed by the Fed to grow its total assets.

Fed chairman Jerome Powell has said the asset cap will not be removed until the Fed approves Wells Fargo’s board of directors’ remediation plans, the plans are implemented and an independent review of the improvements is done by a third-party group “to our satisfaction.”

The updating comes about four months after Hsu made a Jan. 17 speech before the Brookings Institution that questioned the perspective — often held by members of the public and regulators alike — that the nation’s 10 largest banks are simply “too-big-to-fail.”

Bowman Gray IV, a local independent stockbroker, said that the national banks in the U.S. (the nation’s four largest) were the focus of Hsu’s speech. They are — in order of total assets — JPMorgan Chase & Co., Bank of America Corp., Citigroup and Wells Fargo.

The large bank category can also include super-regional banks in the $390 billion to $591 billion asset range. They are — in order of size — U.S. Bancorp, PNC Financial Services Group, Truist Financial Corp., TD Bank Group and Capital One.

Gray said Appendix C represents “a fortification of accountability, certainly the result of Wells Fargo’s actions or inactions as the case may be.”

“Forced divestiture of certain divisions would go a long way to streamline most any oversized and malfunctioning institution.”

Tony Plath, a retired finance professor at UNC Charlotte, said the OCC “doesn’t do stuff like this just for gaslighting purposes, so of course there’s real substance behind their new policy statement.”

“Since it’s quite unlikely that any future bank would display the sort of extreme regulatory disregard and disobedience that’s become synonymous with Wells Fargo over the past five years or so, you might as well call Appendix C here the Wells Fargo Appendix, because clearly, that’s the major regulatory offender at whom this new policy directive is focused.”

Plath said adding Appendix C is Hsu “just clarifying what they’ve been saying all along about Wells Fargo.”

“At this juncture, about the only tool left to them is breaking the bank up into smaller, and hopefully more manageable, pieces that the regulators believe management can handle.

“Is the day approaching when that sort of action becomes likely? Yes, and I suspect we’re very close to it right now.”

The updated manual describes actions the OCC may take against banks that exhibit persistent weaknesses. This could include: requirements that a bank improve its capital or liquidity position; as well as restrictions on the bank’s growth, business activities or payments of dividends.

The OCC also may require a bank to simplify or reduce its operations, including that the bank reduce its assets, divest subsidiaries or business lines, or exit from one or more markets of operation.

“In determining whether a bank’s operations are highly complex or otherwise present a heightened risk, the OCC considers the bank’s size, risk profile, complexity of products and services, and the scope of operations,” according to the appendix.

Potential red flags would include:

• A composite or management component ratings that are 3 or worse, or three or more weak or insufficient quality of risk management assessments, for more than three years;
• Failure by the bank to adopt, implement, and adhere to all the corrective actions required by a formal enforcement action in a timely manner; or
• Multiple enforcement actions against the bank executed or outstanding during a three-year period.

“The OCC has a presumption in favor of additional and increasingly severe action(s) when a bank has continuing, recurring or increasing deficiencies for a prolonged period, particularly when a bank has not made sufficient progress toward correcting the deficiencies,” according to the appendix.

Wells Fargo confirmed on Aug. 31, 2017, that there could be at least 3.53 million accounts affected by its fraudulent customer accounts scandal that erupted in September 2016, up from the 2.1 million initially announced.

Retail-bank employees opened accounts for customers who did not request them, or added non-requested insurance and residential mortgage services. Those moves garnered Wells Fargo tens of millions of dollars in fees.

Wells Fargo has said it cannot rule out that at least 38,722 unauthorized customer accounts were established in North Carolina and 23,327 in South Carolina. Depending on which issue is discussed, the scandal period could go back as far as May 2002, with some customers potentially affected into mid-2017.

Since October 2016, total regulatory penalties against Wells Fargo have added up to at least $11.54 billion.

The CFPB described Wells Fargo as “a repeat offender that has been the subject of multiple enforcement actions by the CFPB and other regulators for violations across its lines of business, including faulty student loan servicing, mortgage kickbacks, fake accounts, and harmful auto loan practices.”

Wells Fargo responded to the CFPB settlement by saying it resolved “multiple matters, the majority of which have been outstanding for several years, related to automobile lending, consumer deposit accounts and mortgage lending.”