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The US Federal Reserve has decided to temporarily relax the $1.95 trillion cap on assets that it imposed on Wells Fargo in 2018, The Wall Street Journal reports.
The decision comes with significant caveats: The bank will only be allowed to exceed the asset cap via loans made through the Paycheck Protection Program (PPP) and the Federal Reserve's Main Street Lending Program, the latter of which has yet to be rolled out. Additionally, any profits from those loans will have to be given to the Treasury or to a nonprofit of Wells Fargo's choosing that focuses on small businesses.
Even with a reduced ability to profit from exceeding its asset cap, the reprieve is a major opportunity for Wells Fargo:
- The caveats on the asset cap relaxation indicate that regulator trust in Wells Fargo remains low. While the easing of its asset cap is big news for Wells Fargo - it has been seeking to get the cap lifted in light of the coronavirus pandemic since late March. However, the heavy restrictions that the Fed has put on its relaxation of the asset cap show that the leeway being granted to Wells Fargo is much more about the necessity created by the challenging economic times than it is about the Fed believing that Wells Fargo has successfully reformed itself.
- But if the bank can dazzle with its efforts to help during the coronavirus crisis, it could gain trust from consumers and regulators alike. Though it won't benefit from a financial perspective, if Wells Fargo can maximize its lending activity during the coronavirus, it will be a boon for its reputation. Giving profits from its small business loans back to the government could elevate Wells Fargo's standing in the minds of regulators, while donating to nonprofits could boost the public's perception of the bank. The important thing for Wells Fargo will to be to lend as much as possible through the governmental programs, as the more aid it dispenses and the more profit it gives away, the greater the positive effects.
The biggest losers from the Fed's decision will be Wells Fargo's major US bank competitors. Prior to the relaxation of Wells Fargo's asset cap, other major US banks were facing a reality in which one of their biggest competitors for PPP loan issuance was handcuffed.
Now, however, Wells Fargo will likely be more than capable of taking a big bite out of the $350 billion worth of PPP loans that will be available for disbursement by banks - it has said previously that it has the capacity to lend an additional $384 billion to consumers and businesses.
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