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Wells Fargo CEO Charlie Scharf seemed to express impatience Wednesday that big banks are in a holding pattern over regulators’ capital requirements rule, calling the uncertainty “a crazy way to run a system.”
“We absolutely want it to be finalized,” Scharf said of the Basel III endgame, during an appearance at an annual Goldman Sachs financial services conference in New York. “It’s just a strange position to be in, to have some of the most significant companies in this country unsure of what their capital requirements are going to be.”
The fate of the capital requirements proposal has been uncertain, potentially made more so with Donald Trump’s reelection. The proposed rule, first floated in July 2023, would have increased the amount of capital the nation’s largest banks need to hold by about 19%. After strong industry backlash, Michael Barr, the Federal Reserve’s vice chair for supervision, previewed potential changes that would drop that down to 9%. But it appeared not all bank regulators were on the same page about those changes.
Days after Trump’s reelection, regulators acknowledged the proposal isn’t likely to move forward during outgoing President Joe Biden’s term, and Barr told the House Financial Services Committee the central bank expects to work with new colleagues at the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. in the coming year on the proposal.
That’s led to industry speculation over what the capital requirements rule — intended to get the U.S. aligned with Basel standards — will ultimately look like, if or when regulators move ahead with it.
Wells Fargo seeks “closure” on the issue, and wants regulators to approach it thoughtfully, “based upon analysis of, if things need to change to get to a final answer, what should that be?” Scharf said.
The CEO said he’s “hopeful” the industry will get that, although he’s unsure of timing with the capital requirements rule, given assumed leadership changes at the OCC and the FDIC’s board.
“Hopefully, as these positions get filled out, we will get to a finalized Basel III, which ultimately makes sense,” he said.
Scharf said he is optimistic the end result won’t be much different from where Wells is now. The bank’s common equity Tier 1 ratio was 11.3% in the third quarter, and will likely remain around 11% until the bank receives more clarity around the rule, Scharf said. Once it’s finalized, Wells can speak with more certainty about capital levels, he added.
As for the work Wells continues to do to address risk management and control shortcomings identified by regulators, Scharf expressed confidence, saying he feels strongly that the bank is making “extremely good progress.”
The bank remains under nine consent orders, including a $1.95 trillion asset cap, imposed by the Fed in 2018; Bloomberg has reported the bank has submitted a third-party review of changes it’s made for the Fed to consider. The bank’s latest enforcement action came in September, related to deficiencies with its anti-money laundering internal controls and financial crimes risk management practices.
From a controls perspective, the company is in a different place today than it was when Scharf joined the bank in 2019, but Wells remains committed to completing all necessary work, he said.
“We have a very high degree of confidence that we’re going to get there in a reasonable period of time,” he said. Six consent orders have been lifted since Scharf became CEO.
For every consent order and regulatory deliverable, “we have extremely detailed plans in place that the regulators have reviewed. And we track our progress at the operating committee every single week,” he said.
As the bank adds controls and compliance measures, it goes through detailed review processes to validate the work before it seeks validation from regulators.
“When I talk with a greater degree of confidence that we’re getting things done, we’re getting things over the finish line, it’s because we see all those internal metrics,” Scharf said.
Those changes translate to better management of operational risk and compliance in the company, and create a framework that gives the bank confidence to grow, he said.
“We’re identifying issues ourselves, we’re solving them like normal companies do before they become bigger issues that are specific to us — you see it in terms of just our operational errors that run through the income statement coming down over time,” Scharf said.
The OCC lifting the sales practices consent order in February was “huge” for Wells’ consumer bank, Scharf said. “When we think about the problems that we’ve had, that was the most visible” to American consumers.
“It forced us to undo a lot of the things which really related to how the consumer and small business bank was run,” he said. Wells “eliminated compensation plans, we eliminated branch [profit and loss statements], we eliminated reporting that would potentially incent people to sell things, because there was this big question mark around, where did we have the right controls in place?” he said.
With the right controls in place, the bank can feel confident restoring those elements in a measured way, to help fuel the bank’s growth, he said.
“We’ve been fighting to keep the same share that we’ve had, because we’ve taken all of these things away,” Scharf said, pointing to the share gains other large national banks have attained while they could operate without the same restrictions as Wells.
Wells is seeing the start of net checking account growth and debit card point-of-sale volume, he noted.
“We get questions all the time, ‘Are the regulators actually going to let you out of these things?’” Scharf said. “I can say yes all I want,” but something like that “is an incredibly important statement.”
