The Wells Effect - What's Next?

Damage Control or Play to Win?

Recently, after compiling statistics from the June 30th Report of Deposits, we learned that large banks had expanded their deposit market share and many said they were approaching dominance. That was before the Wells Fargo deposit fraud turned up over $2.6 million of unauthorized deposits which caused the firing of over 5,300 employees. So, now this has become a thorn in the side of large mega banks. Therefore all the smaller financial institutions will be the big winners and all they have to do is show up for work and watch the new customers line up to switch over. Is that what is happening? Will it happen? Well, not so fast.

Unfortunately, much of the migration of deposits to larger institutions may have occurred during the most recent economic catastrophe, which began in 2008. Consumers have not yet forgotten how hundreds of smaller financial institutions failed. They don't see that Wall Street caused much of this through the promotion of subprime loans. When these loans became extinct, the entire housing market crashed and burned. There was no money to purchase available housing inventory, no need for all that land which had been subdivided in lots. The typical public just remember massive smaller financial institution failures, right? For those institutions that amassed significant capital or avoided concentrations in loans supporting this housing bubble, they still became tainted.  

Wait a minute! This same public remembers the large bank players that facilitated this mortgage and real estate crisis, correct? There was a big bank government bailout right? I vote yes on both of those. So, the state of banking for Wells Fargo, Bank of America, Chase and others left a bad taste in most taxpayers' mouths. Besides, they were foreclosing on thousands and thousands of mortgages weekly leaving folks homeless. There has been hundreds and hundreds of law suits against these big banks for mishandling the collection processes that led to many of these foreclosures. So, the black eye was industry-wide.

Therefore, the fallout from the Wells Fargo account fraud has now reminded the public what happens when management focuses too heavily on production quotas. So, the public now worries how many other banks will make headlines for similar practices. After all, they witnessed the domino effect during the mortgage meltdown.

The most negative fallout of the recent Wells Fargo fraud is the regulatory impact. Members of Congress are calling on the regulators, especially the CFPB, to impose additional layers of regulation to help prevent the future recurrence of such events. Presidential candidate Hillary Clinton has promised that if elected she will impose additional regulations to deal with the same prevention. Regulatory specifics are not yet known. However, all we need is grandstanding and additional regulations, NOT. 

What can be done to recapture, maintain or grow deposit market share? How can financial institutions with grow goals capitalize? First, communicating to all that will listen that your institution does not compensate employees based on deposit quotas. Contrast what you do with what Wells Fargo did. Next, don't be fooled in to believing that this exact issue is your only exposure. It's time to inventory how you compensate employees charged with production of loans and deposits. We all know that aggressive loan production can lead to excessive credit losses. However, we should revisit the fact that smaller balance deposit accounts are only profitable if they generate fee income or if they are tied to quality loan production. Maybe it's time to evaluate the profitability of these accounts. Finally, make sure that internal controls are in place to alert management to any possible red flags that could cause reputation risk before we regret not considering what could be the obvious, as it could have been for Wells Fargo long before it became an expensive crisis had they opened their eyes sooner or simply had better preventive internal controls. 

Danny F. Dukes is the managing member of Danny F. Dukes and Associates, LLC, a forensic and financial institution and tax consulting firm founded in 2010 and located in Canton, GA. For additional information please refer to their website at https://www.dannyfdukes.com or email Danny at [email protected].