Regulators on Dec. 13 rejected Wells Fargo & Co.'s resolution plan, an emergency strategy required by regulators as part of an effort to prevent another taxpayer bailout. The bank was the only one to not follow a particular strategy that regulators clearly favor but that at least one academic thinks exacerbates the problem of too-big-to-fail banks.
The FDIC has advocated the benefits of a "single-point-of-entry" resolution strategy, but Wells Fargo and Bank of New York Mellon Corp. resisted the call. After regulators rejected both banks' plans, BNY Mellon pivoted to a single-point-of-entry plan that passed muster in today's announcement. Wells Fargo stuck to an alternate plan, known as a "bridge bank" strategy, and failed. Arthur Wilmarth, a law professor at George Washington University, thinks single-point-of-entry essentially codifies too-big-to-fail because it ensures the operating subsidiaries remain functional.
"It's essentially a bailout for all the Wall Street creditors of the operating subsidiaries," Wilmarth said. Single-point-of-entry resolution plans typically rely on debt that is converted into equity during a time of crisis. Wilmarth said regulators have discouraged the sale of that debt to financial institutions, meaning mutual funds and pension funds are the most likely buyers of the debt that would be at risk during a crisis.
"Mutual funds and pension funds are going to be the chumps of choice," Wilmarth said. "There would be huge political outcry. So, either [mutual funds and pension funds] get a haircut, which is unfair, or they won't be able to do it and have to use a government bailout."
Wilmarth favors the "bridge bank" framework as envisioned by Wells Fargo. A bridge bank strategy transfers the majority of the institution's assets and liabilities into the bridge bank. Certain assets and liabilities would be sold off on a case-by-case basis, the proceeds of which would allow the bridge bank to emerge from receivership. While senior officials said they were agnostic about the types of resolution plans, some say it has become clear that the single-point-of-entry is the preferred method for regulators.
"In a sense, they're agnostic, but they clearly like people to use it," said Justin Schardin, director of the financial regulatory reform initiative at the Bipartisan Policy Center.
Wilmarth's take on single-point-of-entry is by no means a consensus opinion. Schardin embraces the concept of single-point-of-entry. "[Single-point-of-entry] seems like it's gone a long way toward addressing too-big-to-fail," he said.
Aaron Klein, a fellow in economic studies for Brookings Institution, also favors single-point-of-entry over a bridge bank. "Multiple-points-of-entry failure during a period of financial stress would be extremely messy and complicated," Klein said.
Mayra Rodriguez Valladares, managing principal of consulting firm MRV Associates and an outspoken critic of certain regulatory efforts, also endorses single-point-of-entry. "If you don't have a good single-point-of-entry, it would be a very scattered process," she said. "This is about having a resolution that would cause as little damage as possible to the system."
Senior regulatory officials said Wells Fargo's fraudulent accounts scandal had nothing to do with the failure. And while officials said they were agnostic about which strategy is best, Wells Fargo stands out as the only bank without a single-point-of-entry strategy and the only bank to fail the regulators' test. Failing to pass the test carries a significant penalty for the bank, and there will be intense pressure to pass soon. If the bank cannot fix the deficiencies within two years, regulators can force it to sell off parts of its business. Already, the failure to pass will hurt the bank since regulators have determined it cannot engage in nonbank acquisitions.
"That's a big deal because banks have grown, in part, through an acquisition strategy," Klein said. "Particularly in a world where fintech is a growing competitor to banks but also a growing partner, there are many times when a bank would want to acquire a nonbank company for strategic purposes."