The recent public enforcement action taken by the OCC against Wells Fargo for its “unacceptable” inability to effectively run its operations yet again highlights substantial continuing problems at the bank that must be addressed immediately. This was a follow-on action from one in 2018 that identified material deficiencies with respect to basic processes needed to run a bank well and not harm customers.

The decision to use public actions is not taken lightly by regulatory agencies, which generally prefer to address such matters in private. It is a notably positive step for the OCC to have taken this public action, which includes not just a monetary penalty but also restrictions on Wells Fargo’s mortgage business activities. This action is a further indication that problems at the bank are particularly egregious and, in addition to leading to harm to consumers, jeopardize the bank’s safety and soundness.

While well intentioned, however, this action is yet another reminder of the general weakness of banking supervisors’ standard enforcement tools, which rarely go far enough to hold boards of directors and senior managers at banking behemoths directly accountable for failing to fix significant problems in a timely manner. This action is unlikely to create the kind of incentives needed to force this repeatedly recalcitrant and badly run bank to finally establish functional management, oversight, systems, and controls. Five years after the notorious “fake account” scandal, and three years after regulators’ 2018 order “requiring” Wells Fargo to address problems in the same activities targeted in this action, the bank continues to harm consumers and be dangerously and badly run.

Far more consequential actions are clearly needed and warranted when the largest banks demonstrate the kind of systemic—and repeated—deficiencies evident at Wells Fargo. Simply assessing a fine and slapping the bank on the wrist is inadequate. While the restrictions on certain activities in this case may be helpful, the monetary penalty is paltry and symbolic. The $250 million fine stemming from this action is immaterial to the bank—less than 4% of the bank’s $6.4 plus billion of average monthly net revenues. It is noteworthy that the banks’ stock increased in value after the OCC’s action and fine was announced.  The initial 2018 fine was twice that amount and obviously even that fine size proved to be insufficient motivation for the bank.

But the OCC’s insufficient fine and other measures are not the only problem here. The OCC’s public action leads to a critical question regarding the ongoing failures at Wells Fargo—where is the Federal Reserve? It is a question that has been asked before, and not that long ago. The lack of new Fed action related to these issues at Wells Fargo is curious, though perhaps not surprising. The complex structure of the bank regulatory regime in the U.S. often leads to distinctions being made between supervisory responsibilities for national banks that are overseen by the OCC and for the holding companies that own those banks, which are overseen by the Fed. Such distinctions are often overstated and almost always unhelpful. Boards of directors at bank holding companies are responsible for the entire organization, including all bank and non-bank subsidiaries. It is the Fed’s job to assess the effectiveness of these boards and their management teams and take action when necessary. The ultimate responsibility for any material weaknesses in risk management, processes to ensure compliance with rules and laws, and an ineffective internal audit department rests with the bank holding company board.

The issues at Wells Fargo identified by the OCC and their ongoing nature are indeed unacceptable, but they are much more than that. They are a clear indication of one or more alarming possibilities:

1) The board of directors and its senior management team are simply incompetent and thus unable to ensure one of the largest banks in the U.S. is run safely and in compliance with rules and laws;

2) The board and senior management do not care enough to ensure the bank is well run (except perhaps when it comes to things that directly increase short-term profits), indicating that past actions by regulators have not been strong enough to provide meaningful incentives for those responsible for the firm; and/or

3) The firm is either too big to manage, or, alternatively, the costs of managing it safely and effectively are seen as prohibitive by the board—i.e., would cut into the bank’s profits—so they attempt (and fail) to muddle through with dangerous practices rather than bear the costs of correcting them.

It is imperative for regulators and supervisors at the Fed and OCC to determine which or all of these possibilities explain Wells Fargo’s ongoing failures.

Unfortunately, supervisory assessments of banks made by the OCC and the Fed are confidential and not released to the public.[1]  As a result, the public cannot know the extent to which the ongoing problems at Wells Fargo informs the overall Federal Reserve assessment, including its assessments of its board of directors and management team. However, Wells Fargo’s bank represents over 90 percent of the assets of the entire firm, so critical problems at the bank are critical problems at the bank holding company, which is where the Fed’s responsibility is highest. If Wells Fargo is to finally start materially improving its management, systems and controls, the Fed must take further actions that create strong enough incentives to prompt Wells Fargo’s holding company board to take the necessary actions and spend the money needed to strengthen the firm’s practices.

One would think that the Fed’s unprecedented asset cap would have provided not only sufficient but overwhelming incentive for Wells Fargo to address all of its weaknesses.  While clearly insufficient, that asset cap is necessary and must remain firmly in place until the bank has unambiguously demonstrated over an extended period of time that it can operate safely and without harming or cheating its customers.

Further, the Fed should restrict all dividends and share buybacks under its capital plan rule citing the outstanding concerns and safety and soundness issues raised in the OCC action and, presumably, in the supervisory assessments. Wells Fargo’s board of directors should not be allowed to reward shareholders and executives by returning capital to them while the firm is so poorly run it harms its customers and remains a threat to the financial system. Instead, the board of directors should be spending that money to address its longstanding problems once and for all, as quickly as possible and no matter how much it costs. That would put the costs of fixing the Wells Fargo’s deficiencies where they belong: on its owners, the shareholders, who might then decide to hold management accountable.  That, after all, is how market discipline is supposed to work, but the fines and actions thus far have been clearly inadequate to get shareholders’ attention and engagement.

If such actions fail and if Wells Fargo remains unable to resolve these very serious deficiencies that harm consumers and threaten systemic stability, then Wells Fargo will have proved that it is indeed too big to effectively manage.  At that point, the Fed should take action to break up the organization over time, as recently suggested by Senator Elizabeth Warren in a letter to the Fed.

Given their ability to threaten the entire economy and their backing by taxpayers in the event of failure, systemically important banks must be held to the highest standards and those at the banks responsible for ensuring they are not dangerously run must be held accountable for serious deficiencies. It poses too great a risk to the taxpayer, the financial system, and the economy to allow banks as large and complex as Wells Fargo to fail in the execution of basic risk management and consumer protection. Responsibility for failures of this magnitude rest in the hands of the board and senior management at the holding company level. The regulatory agencies—and the Fed in particular—must be stronger in holding them directly accountable in meaningful ways that create real incentives to fix the problems rapidly.

[1] Bank supervisory assessments follow the CAMELS rating system, where each letter in the acronym represents the six factors by which banks are assessed – capital adequacy, assets, management capability, earnings, liquidity, sensitivity. The rating system is on a scale of one to five, with one being the best rating and five being the worst rating. The assessments and final ratings are confidential and not released to the public, but there is a debate as to whether that should be the case, since the release would provide economic and market incentives for banks to improve.