The US Federal Reserve has taken the unprecedented step of ordering Wells Fargo to halt growth until its corporate governance shortcomings are overcome.
As such, the beleaguered bank is not allowed to grow beyond the $1.95 trillion (£1.4 trillion) in assets that were already on balance sheets at the end of 2017. The Fed also announced that three unnamed Wells Fargo board members would be replaced by April, with another stepping down before 2019.
The news is another blow for the bank, which was left reeling after a sales scandal became public in 2016. Thousands of Wells Fargo employees had been opening fake bank accounts in customers' names in order to meet tough internal targets.
This resulted in some customers getting charged fees when their legitimate accounts became overdrawn due to covert transfers made to bogus accounts.
Wells Fargo punished for compliance failures
Following the incident, Wells Fargo agreed a $180 million settlement with the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency and a Los Angeles prosecutor.
"We cannot tolerate pervasive and persistent misconduct at any bank, and the consumers harmed by Wells Fargo expect that robust and comprehensive reforms will be put in place to make certain that the abuses do not occur again," said Fed board chair Janet Yellen in a statement.
The Fed also criticised the bank for a business strategy that prioritised growth without taking adequate consideration to risk management. A poor risk framework was the cause of "serious compliance breakdowns" at the firm.
Former chairman and CEO John Stumpf and ex-lead independent director Stephen Sanger – as well as all Wells Fargo board members – were sent letters scolding them for failing to meet supervisory expectations.
According to Reuters, Wells Fargo believes the Fed's intervention on growth will cost the company between $300 million and $400 million of profit in 2018. This is the equivalent of between 1.5 and 1.9 per cent of the bank's profit last year.
Wells Fargo said the move will require the enterprise to scale down parts of its balance sheet in order to grow core businesses. Corporate deposits and trading assets are areas expected to see cuts.
Risk and compliance overhaul 'well underway'
Current CEO Tim Sloan tried to allay investor fears regarding the halt on growth, stating that the Fed restrictions would only have a "manageable" impact on this year's profits.
"We are in a very competitive business, whether we have a consent order or not," said Mr Sloan. "Our marching orders to our team are: go out and serve your customers, fulfil our vision, take deposits, make loans. We are open for business."
He noted that the announcement was merely another step in the right direction for Wells Fargo, which he claimed had been overhauling risk and compliance operations for some time.
The bank has already made a number of high-profile appointments following the $180 million settlement. For example, new head of regulatory relations Sarah Dahlgren is a former New York Fed official, while current chair Betsy Duke was once a governor for the central bank.
It is likely the organisation will continue to hire new executives and centralise risk management functions in order to comply with the Fed's demands.