By Ryan Tracy And Victoria McGrane
WASHINGTON--U.S. regulators said Wells Fargo & Co. has
convinced them that the financial system would not likely be
seriously damaged if the bank were to ever collapse, giving it a
passing grade that ratchets up the pressure on other big banks
slammed for producing unrealistic bankruptcy plans a few months
ago.
The San Francisco-based lender graded better than its peers
Tuesday on its plan for a theoretical bankruptcy, but it still
doesn't have the top score regulators would like to see.
The bank declined to comment.
The Federal Reserve and Federal Deposit Insurance Corp. said a
hypothetical bankruptcy plan submitted by Wells Fargo "provides a
basis for a resolution strategy that could facilitate an orderly
resolution under bankruptcy" but said the blueprint still had some
shortcomings that must be addressed when the bank files a revised
plan in 2015. The agencies didn't specify the shortcomings.
"Resolution" is shorthand for the process of unwinding a failing
firm.
The results are the latest indication that regulators favor
simplicity. Though it is one of the largest bank holding companies
in the U.S. by assets, Wells Fargo has a simpler structure than
other conglomerate financial firms. Compared to peers like J.P.
Morgan Chase & Co., Wells Fargo has a relatively small
broker-dealer business and a relatively small international
footprint. Much of its operations take place in its FDIC-insured
banking subsidiary.
Regulators had faulted the 11 firms reviewed in August for,
among other things, not doing more to establish "a rational and
less complex legal structure."
Analysts said regulators appear to be pointing to Wells as an
example for other firms.
"The regulators are saying...'Look more like Wells Fargo.' Wells
Fargo is the reference point for the other big banks in terms of
reducing the degree of complexity. It's a large bank but it is not
as complex," said CLSA bank analyst Mike Mayo.
"I don't think it's an accident that the first approval came out
from what is thought to be a simpler, more traditional bank," said
Brian Gardner, a Washington analyst with investment bank Keefe,
Bruyette & Woods Inc.
Tuesday's news added more sting to the black eye for the 11
banks whose plans were rejected this summer by showing that it is
possible to satisfy regulators. Following the rebuke by regulators
in August, some in the industry speculated it could be impossible
to meet the requirements for a credible bankruptcy plan.
That Wells Fargo appears to have found a winning formula
increases pressure on other firms to win a better result for their
own plans, which will be filed in July 2015.
It is crucial for banks to have plans that regulators judge as
credible, because the 2010 Dodd-Frank law gave regulators power to
break up firms who continually fail to submit credible plans.
The industry has already made progress on one of the five key
changes regulators said they needed to see: incorporating a "stay"
or pause for early-termination rights in banks' derivatives
contracts. Regulators believe such a pause is key to enabling firms
to be cleanly dismantled in a future panic. Last month, 18 global
banks voluntarily agreed to wait 48 hours before seeking to
terminate derivatives contracts from a troubled financial
institution, a deal the Fed and FDIC had been pushing the industry
to accept.
International regulators also recently proposed new rules for
big banks to hold more loss-absorbing capacity in order to avoid a
taxpayer bailout. The Federal Reserve is expected to soon propose
the U.S. version of those rules. Wells Fargo, for its part, has
said it shouldn't be subject to the same loss-absorbing capacity
rules as more complex firms.
At a news conference Tuesday unrelated to the Wells Fargo
announcement, FDIC Chairman Martin Gruenberg said regulators are
making progress in ensuring large banks aren't "too big to fail"
and won't require a taxpayer bailout during a period of stress.
The recent announcements on loss-absorbing capacity and
derivatives "are significant steps toward significantly improving
the prospects for resolving large systemically important financial
institutions without disruption to the financial system," he
said.
Write to Ryan Tracy at ryan.tracy@wsj.com
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