Since the announcement last night, much has been said about the unexpected departure of Tim Sloan from Wells Fargo.  What’s overlooked is what this means not just to Wells Fargo, but also for banking-industry political risk management.  To focus solely on Wells is to miss the broader message for all banks that aren’t community institutions bolstered by political-risk armor plate:  the combination of populist and progressive sentiment that elected both Donald Trump and the Democratic House is a red-hot danger zone for any large bank which noisily transgresses consumer, conflict, or compensation norms.  When trouble strikes now, the question has to be not “whom do we hire,” but “what did we do and how can we make it right.”

Why is the Wells case so different than others in which very big banks faced very tough reputational problems?  It’s not only because Wells’ failings are so easy to understand and prolonged, but also because 2019 presents a very different political landscape of policy and political risk. HFSC Chairwoman Waters has changed the political-risk profile with her “megabank” legislation.  Her bill essentially says that bank supervisors are on a tight leash – if a very big bank violates critical standards and doesn’t quickly correct its ways at whatever cost, the agency must revoke the GSIB’s charter and break the bank into smaller, presumably more manageable pieces. 

Forced GSIB charter revocation gives the banking agencies an acute case of the willies.  Is this because the banking agencies are captive to their supervisory charges?  Charter-conversion battles reinforce this perception, but break-em-up edicts pose structural and even systemic risks the banking agencies understandably abhor.  Given a short amount of time in a stress scenario with uncertain substitutes for core big-bank activities, regulators generally look for any remedies short of invasive surgery.  Facing threats such as this in concert with broader populist and progressive anger, the banking agencies will thus throw a bank – even a very, very big one – over the wall if that’s what it takes to save themselves from decisions they fear and accusations that undermine their institutional prestige.

Will the Waters bill pass?  Regulators know well that it could, at least in the House. Give Congress a few more reasons to get really angry at very big banks, and it’s possible that even the GOP-controlled Senate could see its self-interest in a megabank-dissolution bill that President Trump – who once called for breaking up big banks – readily signs.  The odds of final passage are low, but no longer negligible and regulators know it.  A decade after a near-death systemic crisis is soon enough for Congress to remember how costly unduly comfy big-bank regulation can prove and for supervisors to fear the consequences of what critics consider undue leniency. 

On Wednesday, an HFSC subcommittee will hold a hearing on executive accountability.  We can guarantee that no fun will be had by Wells Fargo and other big banks.  Members will revisit the financial crisis and the pantheon of CEOs whose companies failed at great cost to everyone but themselves.  Chairwoman Waters has also pledged to hold “bad actors” accountable.  What will this mean in terms of more than reputational risk?  Events will dictate the outcome as much as anything else, but it’s clear that political-risk management must be part of every big bank’s arsenal and every board’s priorities.  Old-school battle plans – hire the lawyers, hire the lobbyists, hire the PR firm, and circle the wagons – are ill-suited for new, gladiatorial political combat.  Now, the bigger the bank, the more tempting the target.