Illinois has suspended $30bn worth of investment business with Wells Fargo as the fallout from its sham accounts scandal spreads to new parts of the US bank.
Michael Frerichs, the state’s treasurer, said the decision by Illinois to follow California in pulling business from Wells was likely to cost the bank “millions of dollars” in lost fee income. “Wells Fargo is a big financial player in Illinois and I hope to send the message that their unscrupulous practices are not welcomed and will not be tolerated,” he said.
While the latest financial hit is likely to be easily digestible for a bank that produced almost $22bn in net income last year, the actions highlight the risks to Wells from the unfolding cross-selling debacle.
Wells, the most valuable bank in the world before the scandal wiped about $30bn off its market capitalisation, is facing investigations and lawsuits after regulators found thousands of its staff created accounts for customers without their permission.
Illinois has been a Wells client since 1970. The bank handles the state’s business as part of its government and institutional banking division, which is separate from its retail banking arm.
The state is to stop using Wells as a broker dealer for about $30bn worth of annual short-term investments, such as repurchase agreements and commercial paper, and re-evaluate its position after a year.
The transactions will instead be handled by the 25 or so financial institutions with which Illinois also does such business.
Illinois may take further action against Wells. It is conducting an audit of unclaimed accounts and has written to the Illinois state board of investment — a pensions manager — calling on it to review its dealings with the bank.
“This is the first step we can take, today,” Mr Frerichs said of the broker dealer business. “We want to make sure the financial institutions we work with have proper internal controls … they [Wells] did not have strong internal controls in place.”
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In response, Wells said in a statement: “We certainly understand the concerns that have been raised.
“We are very sorry and take full responsibility for the incidents in our retail bank. We have already taken important steps, and will continue to do so, to address these issues and rebuild the state’s trust.”
By early afternoon in New York, shares in Wells were down 1.2 per cent, underperforming banking peers. That brings the decline since the scandal erupted last month to 12 per cent.
Pressure is building on John Stumpf, chief executive, to quit over the scandal. He has already agreed to forfeit more than $40m in pay and told Congressional lawmakers he is “deeply sorry”.
Last week, California’s treasurer put a one-year ban on doing business with Wells — which is based in the state — and called for Mr Stumpf to resign.