That rumble you felt on Sept. 8 was not another earthquake in Oklahoma. It was the heads of thousands of community bankers hitting their desks as soon as they heard that Wells Fargo had been fined $185 million for creating some 1.5 million unauthorized retail accounts.
The biggest piece of the penalty, $100 million, will be paid to the Consumer Finance Protection Bureau, and that’s significant only in that it is the largest fine the CFPB has levied since it began operations a year after it was created by the Dodd-Frank Wall Street Reform & Consumer Protection Act of 2010. It certainly isn’t a significant blow to the second-largest U.S. bank by assets ($1.7 trillion); the full $185 million represents less than 1 percent of its $20.7 billion in net income last year.
What’s far more significant, as bankers and critics alike quickly acknowledged, is that Wells Fargo’s shenanigans are an impediment to rebuilding trust in the banking industry.
“Wells Fargo just proved, again, that no scam is beneath America’s financial institutions. And no institution is above being watched by a federal agency,” Huffington Post business writers Emily Peck and Ben Walsh wrote in an analysis titled “Wells Fargo Just Made The Case For Elizabeth Warren’s Bank Agency.”
That’s the kind of language that makes bankers throw up in their mouths. But, really, is the message very far from the Independent Community Bankers of America’s condemnation of Wells Fargo?
“Not only is this conduct appalling and harmful to American consumers and communities, it also contributes to the growth of excessive regulation that needlessly burdens the local community banks that do right by their customers,” ICBA CEO Camden R. Fine said in a written statement. “While Wells Fargo has the luxury of throwing money at the problem to make it go away without its board or senior management being held accountable, the individuals and local institutions affected by its actions will continue to suffer for years to come.”
That talk of suffering isn’t hyperbole. Economists from the Federal Reserve Bank of St. Louis reported in July that smaller banks really are hit much harder by the cost of regulatory compliance.
Economists Drew Dahl, Andrew P. Meyer and Michelle Clark Neely analyzed data on compliance costs from a survey of 469 banks. “We found that, in 2014, the ratio of compliance costs to total noninterest expense increased substantially as the size of the bank decreased. For example, banks with assets of $1 billion to $10 billion reported total compliance costs averaging 2.9 percent of their noninterest expenses, while banks with less than $100 million in assets reported costs averaging 8.7 percent of their noninterest expenses,” they wrote in the July issue of The Regional Economist.
The survey didn’t look at banks with more than $10 billion in assets, much less truly enormous ones like Wells Fargo, and they do have regulatory burdens that smaller banks do not. (The 2011 Durbin Amendment caps debit card swipe fees that banks with more than $10 billion in assets can charge to merchants, reducing revenue by millions as soon as a bank crosses that threshold.)
But it is undeniably the smaller banks — the ones that don’t have 1.5 million real customers, much less that many phony accounts — who have paid and are paying and will continue to pay the most for the bad acts of the banks that are too big to fail. And years of lobbying for relief can be wiped away by a screaming headline like this from The Wall Street Journal: “Wells Fargo Fined for Sales Scam.”
The fines imposed, while a mere pinprick, are far more than Wells Fargo benefited from the fake accounts, which were apparently created by low-level customer service employees under pressure to meet sales quotas. The total collected in bogus fees was only about $2.6 million; firing and replacing the 5,300 employees involved in the scam (which continued for at least five years) undoubtedly cost more than that.
For Wells Fargo to keep discovering phony accounts and keep firing people for the same violations for half a decade suggests that the management didn’t understand that (in the words of Olivia Farrell, our CEO at Arkansas Business Publishing Group) you get the behavior you incentivize. (The executive who oversaw the consumer banking unit, Carrie Tolstedt, is retiring at age 56 with a $124.5 million golden parachute.)
Full disclosure: My husband and I were satisfied Wells Fargo mortgage customers until May, when we paid off our house. (Mainly I just love saying that we paid off our house.)
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Gwen Moritz is editor of Arkansas Business. Email her at GMoritz@ABPG.com. |