Wells Fargo penalties reflect the continued plague of too-big-to-fail (2024)

By Brad M. Bolton

The Consumer Financial Protection Bureau’s latest—and historically large—penalty against Wells Fargo Bank reflects the unfortunate fact that the too-big-to-fail problem is alive and well. With every offense by the nation’s Wall Street firms contributing to the outsized regulatory burden facing the nation’s Main Street community banks, policymakers should continue working to rein in too-big-to-fail financial institutions—and megabank customers should look into their local community banks as a superior banking alternative.

The CFPB made headlines this week by ordering Wells Fargo Bank to pay more than $2 billion in redress to consumers and a $1.7 billion civil penalty for legal violations across several of its largest product lines. But this week’s penalties are only the latest in a long line of bad behavior by Wells Fargo and other large banking institutions. Wells Fargo has accrued more than $20 billion in regulatory penalties on more than 200 violations since 2000. Since Wells Fargo’s 2016 scandal, in which it created phony bank accounts for an estimated 2 million consumers, its questionable practices have drawn continued scrutiny from regulators and Congress.

For relationship-focused community bankers whose business is reinvesting in the local communities in which we are based—and who the Independent Community Bankers of America proudly represents—this conduct is shocking and disgraceful. But the outrage is magnified by the fact that this behavior endangers our banking system and economy, and it ultimately leads to excessive regulatory burdens on the community banks that do right by their customers.

Wells Fargo’s behavior reflects the persistence of the nation’s too-big-to-fail problem, in which a handful of megabanks enjoy a government guarantee against failure—and may treat their customers with impunity—because of the risks they pose. It is widely understood that the sheer size and complexity of too-big-to-fail firms leads to harmful consumer practices, incentivizes risky behavior that puts our financial system at risk, and holds taxpayers hostage to the whims of Wall Street.

But community bankers are further bedeviled by too-big-to-fail’s creation of an unfair competitive advantages for the largest banks that enjoy a taxpayer-funded backstop, the damage too-big-to-fail poses to the reputation of the entire banking industry, and—perhaps most frustrating of all—its contribution to the constant, oppressive regulatory burdens that community banks face every day.

Time and time again, the misdeeds of the largest banks have led to new regulations that roll down onto the community banks that do right by their customers, regardless of policymaker efforts to tailor regulatory oversight. These new regulations can have the perverse impact of driving local institutions out of banking—further consolidating the industry into the hands of the largest and least trustworthy entities.

Enough is enough. We cannot rely on megabanks like Wells Fargo to voluntarily cease their harmful behaviors, especially when their sheer size makes even record-setting regulatory penalties pocket change paid for by shareholders—a minor cost of doing business. Policymakers must continue to advance measures that will help mitigate the systemic risks posed by too-big-to-fail firms, including higher capital and leverage requirements, enhanced liquidity standards, activity restrictions, concentration limits, limitations on the federal safety net, and more effective resolution authority.

Consumers and small businesses have the power to close their megabank accounts and make the choice to bank with a local community bank via banklocally.org. The community banking business model is built upon authentic relationships and continued investment back into local communities—a very different model from that of the megabanks.

We must all work together to address too-big-to-fail and its harmful impact on consumers, local communities, and our broader economy. If the problem is left untreated, our economy will be at the mercy of the megabanks—the antithesis of a free-market economic system.

Brad M. Bolton is president and CEO of Community Spirit Bank in Red Bay, Ala., and chairman of the Independent Community Bankers of America.