Wells Fargo fallout: More pressure to break up the banks?

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Wells Fargo’s image has taken a beating over the past several days, and the scandal over its illegal sales practices are causing concern that the damage could spread.

Among the potential ramifications: More heated calls to break up big banks, dimming enthusiasm to rein in the Consumer Financial Protection Bureau, and still more pressure on executive pay.

“The fallout from WFC’s … recent news will continue to impact both the company and the industry well into next year,” Keefe, Bruyette & Woods analysts Brian Gardner and Michael Michaud said in a note to clients. “We see several policy areas where the impact will be felt the most.”

Wells Fargo, the second-largest bank by market cap and assets, has taken a beating in the public eye over revelations that its workers routinely signed up clients for accounts without their knowledge in order to inflate sales figures. The bank paid $185 million in fines and penalties and jettisoned 5,300 employees involved in the scheme.

The bank’s shares have fallen more than 7.5 percent and are edging into bear market territory.

A pedestrian walks in front of Wells Fargo & Co. headquarters in San Francisco, California.

David Paul Morris | Bloomberg | Getty Images
A pedestrian walks in front of Wells Fargo & Co. headquarters in San Francisco, California.

KBW’s analysis, though, looks specifically at what the fallout will be beyond the bank itself and finds that government regulators and consumer watchdogs will be emboldened.

“The headlines from the WFC settlement regarding unauthorized customer accounts kill any possibility that Congress will make changes to the structure and authority of the Consumer Financial Protection Bureau,” the report said.

Regulators aren’t finished with Wells Fargo.

Federal prosecutors also reportedly are launching a separate probeinto the bank’s practices in the wake of the settlement with multiple agencies.

The next step after that could come from Congress, which collectively has been itching to break up the big Wall Street power institutions whose interconnected nature aggravated the financial crisis. BothHillary Clinton and Donald Trump have indicated a desire to get tough on banks, thought Trump also has vowed to repeal the Dodd-Frank regulations.

“Lawmakers who want to break up the banks will argue that WFC proves that the largest banks are simply too big to manage and need to be split apart,” KBW said. “Large banks will lose additional political capital in the wake of the WFC headlines and will find it tougher to find allies in Congress to defend the banks.”

Other effects include the potential for regulators to require more stringent “living wills” for banks on how they would be unwound if found to be systemically dangerous, and pressure to change how bank compensation works.

Wells Fargo also has come under pressure for not trying to claw bank salaries from employees involved in the illegal practices.

KBW said the issues will pile up to affect both the bank and its fellow financial institutions.

“The headline and reputational risk for any bank in a position similar to WFC is significant, and the ultimate economic issue is whether a bank loses customers … but there are industry-wide implications which will be felt into 2017 and beyond,” the note said. “Even after the WFC headlines subside, the recent news will be a powerful talking point any time policymakers debate changes in regulatory policy.”

KBW has an “outperform” rating on Wells Fargo, with a $57 price target, or 24-percent upside from the current level.

Wells Fargo officials do not generally comment on analyst reports and declined comment on the KBW analysis as well.