Wells Fargo Forced To Unload Numerous Assets During Spring To Stay Under Fed’s Asset Cap Limits

Wells Fargo (WFC) was forced to sell hundreds of millions of dollars in assets this past spring in order to remain under the $1.95 trillion asset cap level mandated by the Federal Reserve.

The Fed had imposed limits on Wells Fargo’s business as a punishment for a 2016 scandal involving employees who created fake new accounts without the consent of customers in order to pad their performance figures.

The Wall Street Journal reported Friday that during the spring of 2020, as the pandemic gripped the economy, Wells Fargo made loans which increased its asset size – as a result the lender had to scramble to fall under the Fed’s limits by unloading various assets.

For example, in late March and early April, Wells Fargo sold off assets related to financing that helps companies like Walmart (WMT) manage their cash flow and pay suppliers. These arrangements are described as “supply-chain financing facilities.” Banks typically sell assets linked to these kinds of deals to other banks and investors. These assets were convenient to sell since they are relatively liquid.

During the spring market turmoil, Wells Fargo also sold about 10% more receivables than it usually does.

The Journal noted that as all banks have to deal with the fallout from the COVID-19 crisis, Wells Fargo also has to abide by the Fed’s punitive rules that restrict its growth.

As companies borrowed hundreds of billions of dollars during the early days of the pandemic, Wells Fargo found itself in an awkward position and had to rapidly sell off some assets as its loan books swelled.

Wells Fargo has remained just under the mandated asset cap over the past two quarters, although in April it got some relief when the Fed allowed it to make some loans though the federal government’s small-business lending programs.

“We must prioritize balance sheet capacity, both assets and deposits, and there’s certainly an opportunity cost for us in an environment like this,” Wells Fargo’s Chief Executive Charles Scharf said two weeks ago.

Wells Fargo may have even more problems.

NBC News reported that two U.S. senators have asked Scharf why the bank sometimes places customers in forbearance programs without their consent under a federal program that was designed to assist homeowners hurt by COVID-19.

Democrats Elizabeth Warren of Massachusetts and Brian Schatz of Hawaii – both members of the Senate Banking Committee – said this practice can harm a borrower’s credit scores.

The senators’ letter said Wells Fargo “appears to be incapable of self-governance,” and these latest missteps “raise even more questions about the inability of Wells Fargo and its leadership team to comply with the law and the needs of its customers.”

Wells Fargo reported a loss of $2.4 billion in its latest quarter.