Wells Fargo received a stern reprimand from the Federal Reserve this past week for failing to meet its obligations to consumers and the community.

In short, regulators have demonstrated yet again that the bank is no longer considered well-managed.

The National Diversity Coalition supports this decision, as it is in line with actions already taken by other bank agencies. The Office of the Comptroller of the Currency rated Wells Fargo as “needs improvement” on its Community Reinvestment Act exam last spring due to violations impacting minority and low-income communities — and no financial holding company with a poor CRA grade can be considered well-managed.

Either the management team knows what is occurring at a bank like Wells and in fact intended to harm minorities and at-risk consumers (which we do not believe), or the management team does not have the proper people or controls in place to prevent harm to such communities. In each case, the bank and its holding company are not well-managed. Similarly, banks that break explicit promises to the communities they serve are also not well-managed.Banks that lose the trust of their communities are more likely to experience liquidity risks, reputational risks and interest rate risks. This often occurs when retail deposits from consumers and community-oriented clients leave the bank and must be replaced by higher cost, more volatile wholesale deposits. Therefore, regulators must consider the strength of the relationship between a bank’s executive team and the communities the bank serves in evaluating how well managed the bank truly is.Until recently, Wells Fargo enjoyed a reputation as a great bank — with over a century of goodwill from community leaders. Wells was known for dedicating itself to strong community collaboration and development activities and had historically led the way with its CRA ratings.Unfortunately, its leadership apparently did not appreciate the economic benefits that flowed from its strong reputation and trust with consumer and community groups. As leadership decisions became influenced by Wall Street acclaim, the bank sacrificed the trust of consumers and communities that had been the key to its success. The bank instead pursued sales strategies that spurred fleeting, unsustainable earnings that short-sighted financial analysts, investment bankers and hedge fund managers celebrated. The needs of Main Street yielded to those of Wall Street — and a new culture of quarterly goals and cross-selling forgot that banking is about trust.Elsewhere, we are seeing an increasing number of banks make public commitments to the communities they serve as a part of regulatory applications, including for mergers and acquisitions. These banks promise to pursue “outstanding” CRA ratings, increased small business lending and affordable housing investments, along with additional minority hiring.But following the regulatory approval of their application, these same banks often forget the economic benefits their strong community relationships brought them, and they forget that their promises to the community matter. Again, the allure of positive comments from Wall Street analysts and others take precedence over the trust they have with their communities.The Fed’s action sets a clear precedent that a bank or holding company that breaches its trust with the community should see its board management team punished as well. Such banks should focus on reprioritizing their consumers and communities and would benefit from seeing their boardrooms better represent the diversity of the communities they serve.Still, despite these latest events, we believe Wells Fargo can quickly emerge as a stronger, better institution. Now that the Federal Reserve has acknowledged the seriousness of the transgressions that have occurred, the National Diversity Coalition is hopeful that this will bring clarity to the path forward for the bank. Community groups should proactively work with Wells Fargo to rebuild the relationships their employees have enjoyed with diverse communities historically.

See Original Article Here – https://www.americanbanker.com/opinion/well-run-banks-prioritize-the-communities-they-serve