Wells Fargo growth to be capped after failing key contagion test by US regulators

Oliver Gill
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Wells Fargo CEO John Stumpf Testifies To Senate Committee On Company's Recent Unauthorized Accounts Scandal
Former chief exec John Stumpf resigned this year in the wake of a customer account opening scandal (Source: Getty)

US banking giant Wells Fargo has been slapped with restrictions on growing its business by US authorities after failing a key "living will" test.

Regulators announced overnight the San Francisco bank had failed the test for the second time this year.

The living will rules are supposed to satisfy authorities contingency plans are in place for a controlled wind-down if banks become insolvent.

The ruling, by the Federal Reserve and Federal Deposit Insurance Corporation, means the bank is not allowed to establish new international bank entities or acquire non-bank subsidiaries.

Read more: Wells Fargo sets aside $1.7bn for legal costs over accounts scandal

The failure caps a tumultuous year for Wells Fargo, which included the resignation of chief exec John Stumpf following a scandal where employees opened as many as 2m bank accounts without the knowledge of customers involved.

In April, Wells Fargo was one of five lenders to fail the test.

Eight of the US' leading banks must put living wills in place in attempt to head-off the potential for contagion from other lenders pulling them all into a downward spiral – as was witnessed during the financial crisis.

Read more: Profits dip at Wells Fargo as it deals with the departure of its chief exec

The bank now has until March 2017 to submit an amended submission. Wells Fargo said it thinks it knows what it needs to do: "We believe we will be able to address the concerns raised today," the company said in a statement.

Concerns remain that if Wells Fargo fails to satisfy regulators it could be forced to shrink in size in order to satisfy authorities it is not so unwieldy it can look after itself in a doomsday scenario.

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