Why are regulators so unwilling to remove Wells’ leaders?

Wells Fargo’s chief executive will testify before Congress next week with the megabank’s reputation even more in tatters than when the bank’s phony-accounts scandal broke one year ago. The nation’s third-largest bank has faced a swirl of fines and lawsuits over allegations that it violated service member protections, overcharged for home appraisals, discriminated against its own employees and falsified mortgage records. One year later, Wells Fargo now admits to creating 1.4 million more unwanted bank accounts than previously reported and, by the way, forcing unneeded auto insurance on some 800,000 customers.

As reprehensible as these exploitative business practices are, the most shocking aspect of Wells Fargo’s repeated scandals is that federal regulators have taken no meaningful action against its leadership. The $2 trillion-asset bank’s board of directors and senior managers are supposed to be held responsible for the institution’s ethical, moral and legal conduct. The record clearly shows they have failed. To hold them accountable, to send a message to systemically risky financial institutions that this conduct cannot be tolerated, and to advance justice for the bank’s millions of victims, federal regulators should replace the bank’s board and senior management.

The penalties Wells Fargo has faced for its actions simply do not measure up to the harm the bank has caused for customers and the broader financial industry. The millions of dollars in fines are decimal dust on the $2 trillion bank’s balance sheet — a small cost of doing big business. The bank clawed back tens of millions of dollars in compensation from former CEO John Stumpf and former senior executive Carrie Tolstedt after their early retirement, but they still left the bank with a combined pay package worth more than $100 million. And the board of directors and other senior management haven’t even received a slap on the wrist from regulators, who are empowered to remove bankers for presiding over unsafe and unsound practices.

Victor J. Blue/Bloomberg

In fact, the only representatives from Wells Fargo who have faced any serious repercussions are the 5,300 front-line employees who were fired last year for engaging in practices fueled by a pressure-cooker sales culture designed to extort customers’ every nickel.

To many in the financial services industry, the ongoing lack of accountability at Wells Fargo is as puzzling as the bank’s practices are disturbing. Had a Main Street community bank engaged in such behavior, its board and senior managers would not only have been forcibly removed, they would be facing prosecution. Small, locally based financial institutions receive no such deference from the teams of regulators and bank examiners to whom they are accountable. Wells Fargo’s scandals have exposed a shameful double standard in the nation’s financial regulatory system — one in which $100 million community banks must meet a higher standard than $2 trillion megabanks. The nation’s largest financial firms are not only too big to fail, they’re too big to regulate.

Further, Wells Fargo’s wrongdoing harms not only its customers, but also the broader financial system in which it operates. Its reckless behavior tars the good reputations of the hundreds of thousands of community bankers who serve their customers honestly every day. It also distorts the regulatory system governing the financial services industry. The risky practices of the largest financial institutions have repeatedly resulted in a broad-brush response from Washington that fails to distinguish between too-big-to-fail financial firms and locally focused community banks. The last thing American communities need is another series of costly regulations that unnecessarily hamper community banks and further drive consolidation of financial resources into the hands of megabanks.

After all, Wells Fargo’s practices are themselves a natural result of the very business model that has taken root at the nation’s largest financial firms. At these massive institutions, profits are derived from the number of financial transactions that can be squeezed out of as many customers as possible. This transaction-based model is worlds apart from the relationship-based business that continues at the nation’s nearly 5,800 community banks. Local institutions are held accountable to their customers because — as friends and neighbors — their livelihoods depend on honest dealing.

Banks should have incentives, not disincentives, to act properly. A built-in motivation to treat customers fairly should be encouraged by the regulators charged with overseeing the safety and soundness of the nation’s financial system. It is long past due for Wells Fargo to be held truly accountable. Regulators can start by removing board members and senior managers who have failed to satisfy their obligations — costing the bank, its customers and the rest of us, dearly.