By Ryan Tracy and Emily Glazer 

The Federal Reserve's unprecedented move to handcuff growth at Wells Fargo & Co. sent a message that boards of directors, not just management, will be held accountable when big banks fail to manage risks.

The Fed on Friday said Wells Fargo would be replacing four board directors in 2018 and announced an enforcement action that limits the size of the third-largest U.S. bank by assets, potentially crimping revenue and profit growth.

While directed at Wells Fargo, which has struggled to overcome the sales practices scandal that engulfed the bank in September 2016, the Fed's action has wider ramifications.

"The Fed just put the fear of God into bank boardrooms across the country," Ian Katz, an analyst at Capital Alpha Partners, said in a note on Sunday. "And that's exactly what it wants to do."

The Fed, which cited "widespread consumer abuses" at Wells Fargo, has never before imposed such a broad restriction as part of an enforcement action. Wells Fargo is barred from growing past the $1.95 trillion in assets it had at the end of 2017, unless it gets regulators' permission. Fed officials did say the company can continue to lend and take deposits.

Wells Fargo said it was "confident it will satisfy the requirements of the consent order."

CEO Timothy Sloan, also a board director, said on a call with analysts Friday evening that the bank within 60 days will submit plans to the Fed "that leverage existing plans and efforts already under way to further enhance the board's effectiveness in carrying out its oversight and governance of the company and further improve the firm-wide compliance and operational risk management program."

A letter Friday from departing Fed Chairwoman Janet Yellen to Sen. Elizabeth Warren (D., Mass.), showed that the central bank is thinking more broadly than just Wells Fargo. Ms. Yellen wrote that the Fed is raising expectations for boards of directors across the banking industry.

The letter cited guidance for boards the Fed proposed in August, which Mrs. Yellen wrote "marks the first time that the Federal Reserve has issued stand-alone expectations for boards of directors as distinct from management."

"That distinction allows us to spotlight the core responsibilities of effective boards, one of which is to ensure the independence and stature of the risk management and internal audit function," the letter said.

Mrs. Yellen handed over leadership of the central bank this weekend to Jerome Powell. He was appointed by President Donald Trump, who has pushed a deregulatory agenda for banks and other industries.

But banks shouldn't necessarily think Mr. Powell will change course. As a Fed governor, he took a leading role in pushing the Fed to adopt the new regulatory guidance for board members.

Write to Ryan Tracy at ryan.tracy@wsj.com and Emily Glazer at emily.glazer@wsj.com

 

(END) Dow Jones Newswires

February 04, 2018 21:00 ET (02:00 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.
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