This week we looked at the principle-agent problem and what went wrong at Wells Fargo. On March 28, 2019, Tim Sloan, the CEO of Wells Fargo, who was supposed to restore the bank's reputation, stepped down. After a very poor showing by Sloan in testimony about the bank before Congress and with long-standing restrictions by the Federal Reserve still in place, the bank seems unable to overcome the crisis created by a whole collection of deceptive practices which rose to the level of fraud. (For more information, refer to the 2018 article "Fed Won't Lift Wells' Growth Cap Until Deficiencies Are Fixed: Powell" fromAmerican Banker.)

On October 21, 2019, Charles Scharf officially assumed the role of CEO. Can he succeed in restoring the reputation of Wells Fargo as "the bank that always does the right thing"? This week's discussion will provide you with an opportunity to put yourself in the shoes of someone advising Mr. Scharf.

Instructions

For this discussion, you are going to advise Mr. Scharf on a key issue.

• What about the incentive system employed by Wells Fargo resulted in massive creation of fake accounts by the retail operation? And why did it only get worse from there?
• As you dig into this issue, remember Froeb's rule from Chapter 1: "Avoid the temptation to think about the problem from the employee's point of view . . . [and ask] how does the organization give employees enough information to make good decisions and the incentives to do so?" (1).
• Your post for this discussion should answer the question above and address components of motivation and incentive in order to present Mr. Scharf with reasonable and evidence-supported advice on this issue.

Article: is below

WASHINGTON The Federal Reserve will not lift the asset cap imposed on Wells Fargo until the bank addresses deficiencies in board oversight and its risk management program, Fed Chairman Jerome Powell said in a letter to Congress last month.

"What happened at Wells Fargo was outrageous. The underlying problem at the firm was a strategy that prioritized growth without ensuring that risks were managed, and as a result the firm harmed many of its customers," Powell said in the letter dated Nov. 28 to Sen. Elizabeth Warren, D-Mass.

In February, the Fedimposed the capon Wells Fargo's growth to address risk management deficiencies that came to light as a result of the bank's phony-accounts scandal. The Fed issued the order right before the departure of former Fed Chair Janet Yellen.

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"We do not intend to lift the asset cap until remedies to these issues have been adopted and implemented to our satisfaction," Powell wrote in the letter to Warren.

The letter, which was first reported by Reuters on Monday, came after Warrenasked the Fed in Octobernot to remove the asset growth restriction until Wells Fargo CEO Tim Sloan is replaced.

Powell, in his letter to Warren, said the decision on whether Wells Fargo's asset growth cap will be lifted will be determined by a Fed board vote.

"The Federal Reserve is actively engaged in reviewing Wells Fargo's progress in meeting the requirements of the Order and in ensuring that the firm comprehensively addresses the deficiencies identified in the Order," Powell said.

Wells Fargo has been embroiled in controversy since 2016, after it came to light that millions of fake accounts were opened in customers' names without their permission.

The Fed's consent order limiting Wells Fargo's asset growth requires the bank to notify the Fed that its remediation plans are acceptable, adopted and implemented, and it requires an independent review of the improvements in risk management and oversight by an "acceptable third party."

The troubled bank has also been under scrutiny for forcing customers intoauto insurance they didn't need, which led to roughly 20,000 customers having their cars seized. And in August, the bankdisclosed a software errorthat miscalculated eligibility for mortgage loan adjustments, leading to roughly 400 customers losing their homes to foreclosure.