Wells Fargo is the first big bank to get its affairs in order. The $1.6 trillion lender secured a conditional stamp of approval from regulators for its living will. Less credible plans from 11 other titans suggest size isn’t the main issue. The real problems are complexity and interconnectedness.
The provisional post-collapse plan submitted by Wells Fargo wasn’t perfect. The Federal Reserve and Federal Deposit Insurance Corp want a revised version for next year. Unlike with other big banks, however, U.S. authorities expressed optimism that Wells Fargo’s blueprint could facilitate an orderly resolution in bankruptcy. The regulatory response also lacked some of the tougher language used by the FDIC when it reviewed the others.
When it comes to scale, Wells Fargo sits in the exclusive $1 trillion-plus balance sheet club. The other three members, JPMorgan, Bank of America and Citigroup, all failed their unwinding-plan tests in August. In terms of market capitalization, Wells Fargo, at $280 billion, also surpasses its rivals. If systemic risk were correlated to size alone, then Wells Fargo ought to be among the riskiest of the bunch.
Its ability to craft a living will more quickly underscores the two big ways in which it differentiates itself. First, Wells Fargo lacks the global reach of other mega-banks. That minimizes cumbersome, cross-border issues others face. The bank led by John Stumpf also has a significantly smaller presence on Wall Street, which means its web of securities and counterparties is far less entangled.
A bank that is easier to disassemble when dead is also probably one easier to manage while it’s alive. That may be a growing part of the message from the living will process. At the same time, the ability of a bank like Wells Fargo to forge a doomsday path, at least on paper, is a sign that the once-maligned concept is taking hold.
Wells Fargo being simple enough to fail should be a small sign of encouragement for shareholders, bondholders and taxpayers. If the more complex institutions can’t draft similarly credible plans, however, they may yet find themselves under renewed pressure to be taken apart long before they expire.