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Wells Fargo fails to resolve 'living will' deficiencies

Wells Fargo & Co. faces restrictions on its international and nonbank businesses after failing to fix issues with its 2015 resolution plan, a so-called "living will" that describes how the company would unwind in the event of financial distress or failure.

The Federal Reserve and the FDIC announced Dec. 13 that because Wells Fargo failed to "adequately remedy all of its deficiencies," the regulators would levy restrictions on establishing international bank entities or acquiring any nonbank subsidiary.

In a statement, Wells Fargo said it is "disappointed" but will "continue to work closely with the agencies to better understand their concerns."

The 2015 living wills received an initial evaluation in April 2016, which originally showed plans from Wells Fargo, Bank of America Corp., Bank of New York Mellon Corp., JPMorgan Chase & Co. and State Street Corp. were "not credible" or would not lead to an orderly resolution under the U.S. Bankruptcy Code. The agencies allowed the five firms to address deficiencies in their plans by Oct. 1 or face prudential requirements or restrictions.

The Fed and the FDIC cleared Bank of America, BNY Mellon, JPMorgan Chase and State Street in the Dec. 13 announcement, stating that all had adequately remediated their deficiencies. In Wells Fargo's resubmission, the agencies took issue with "legal entity rationalization" and "shared services," despite a proper remedy of its issues in the "governance" category. Senior agency officials said their concerns did not have to do with Wells Fargo's decision to use a bridge bank strategy instead of a single-point-of-entry strategy, something that BNY Mellon steered away from.

Senior agency officials said they chose to levy restrictions on Wells' international and nonbank businesses because that's where they had concerns over resolution.

The restrictions will be imposed until Wells Fargo proves to regulators it can properly address the two defined issues. The agencies said Wells Fargo is expected to file a revised submission by March 31, 2017. If the next submission fails to resolve the targeted issues, the regulators will add another restriction limiting the size of the firm's nonbank and broker/dealer assets "to levels in place on September 30, 2016." If the company still can't fix the plan's deficiencies within two years, the agencies could consult the Financial Stability Oversight Council and require the firm to divest assets or operations.

The Fed and the FDIC clarified that the determinations relate solely to the 2015 plans and not to the 2017 resolution plans due next year. Senior officials said they are in constant communication with Wells Fargo to help the bank correct the resolution plan.