Heavy Cargo For Wells Fargo

Image source:

What's going on?

Late last week, Americas third-biggest bank by assets, Wells Fargo, was slapped with unprecedented legal sanctions that will prevent it from expanding at all for the foreseeable future. As markets digested the news on Monday, its stock dropped by the most in more than two years! (tweet this)

What does this mean?

Wells Fargos been snarled up in a litany of scandals in recent years, most notably the revelation that the bank defrauded customers by signing them up for millions of fake bank accounts and then charging them.


While the bank has already paid hefty fines, the US Federal Reserve has now ruled that Wells needs to work even harder at cleaning up its act. The upshot is that it wont be allowed to grow its banking business (measured by the value of its assets, e.g. loans) beyond its size at the end of 2017 without approval. Wells, for its part, says the ban could cost it up to $400 million in profits and that four members of the banks board will leave the company as a gesture of its commitment to change.

Why should I care?

For markets: Several Wall Street analysts have downgraded Wells stock.


Shares of Wells fell almost 10% on Monday as investors digested the news. The initial hit to its profit is an issue but a bigger long-term concern may be that, with Wells lending restricted, other banks could eat more aggressively into its market share.



The bigger picture: Major US banks have bounced back from past scandals and crackdowns.


Back in 2013, JP Morgan had to cough up around $13 billion in legal settlements related to illicit trading activities, while in 2011 a long list of fines and settlements linked to the collapse of the US housing market led to Bank of Americas stock slumping to $5 per share. Both saw their businesses rebound within two years, however and some analysts think that Wells is also capable of an eventual turnaround.

Originally posted as part of the Finimize daily email.

The top 2 financial news stories in 3 minutes. Join over one million Finimizers

Read next

Britain And Europe Square Off

Sign up to Finimize

Get the two most important global financial news stories each day. Sent at midnight UK time.

Get started with one email a day

The top financial news stories in 3 minutes.