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Wells Fargo Scandal Invites Greater Scrutiny Of Big Banks: Essential Fintech Reading Sept 24-30

Wells Fargo Scandal Means Renewed Scrutiny Of Big Banks

Lucinda Shen of Fortune writes that the Wells Fargo scandal "could again force regulators to take a deeper look at bank culture. Banks have been increasingly pressured to widen profit margins despite low interest rates and heavier regulation since the financial crisis ... Advocacy groups have also noted aggressive sales tactics, similar to those that led Wells employees to create fake accounts" at other financial institutions. Federal Reserve Chairwoman Janet Yellen promised lawmakers that the Fed will "scrutinize all big banks in the wake of Wells Fargo & Co.'s phony account scandal," writes Ryan Tracy of the Wall Street Journal. “We are undertaking a look comprehensively not only in the consumer area but compliance generally because there has been a very disturbing pattern of violations,” said Yellen, alluding to businesses such as mortgage lending and foreign-exchange.

Deutsche Bank Unlikely To Be Bailed Out By German Government, Stock Rallies On Reports Of Lower DOJ Fine

Eurasia Group research director Mujtaba Rahman and analysts Federico Santi and Charles Lichfield said that speculation over a German government bailout of Deutsche Bank is misplaced, given the precarious political position of Angela Merkel's CDU party. The analysts noted that a bailout would drive more voters into the arms of the right wing Alternative for Germany (AfD) party. "An injection of public money, ahead of critical elections next year, would kill Merkel politically. Less damaging political alternatives are therefore much more likely," the analysts noted. On Friday, Deutsche Bank CEO John Cryan wrote a letter to company staff appealing for calm and stating that worries over the bank's financial health are overstated. The bank's margins have been pressured by record low interest rates and the cost of new regulations while the U.S. Department of Justice has demanded $14 billion in fines related to the bank's role in the global financial crisis. However, French news agency AFP reported late Friday afternoon that Deutsche Bank had reached a deal to settle the allegations for only $5.4 billion.

LendUp Fined By CFPB

It was supposed to operate in stark contrast with payday loan sharks that rip off the poor but TechCrunch reports that LendUp instead "charged customers illegal fees, miscalculated interest rates, falsely advertised loans nationwide that weren’t available there and misled people that borrowing from LendUp would boost their credit score." LendUp will now be paying $6.3 million for these violations, including a $1.8 million fine by the Consumer Financial Protection Bureau. LendUp CEO Sasha Orloff told TechCrunch that his company didn't have a large enough compliance and legal team to review all of its promotions and has since remedied the situation by refunding wrongly charged customers and creating a 15 employee legal and compliance division, larger than the entire company at the time of the infractions.

Shrinking Finance Industry On The Horizon?

Bloomberg columnist Noah Smith writes that "finance may have outgrown the sustainable limits of its role in the U.S. economy, and might now have to endure a long and painful era of retrenchment." Since 1980 the share of GDP going to the finance, insurance and real estate industries has risen from less than 4 perent to 8 percent.


While robots will increasingly replace human traders, "the general regulatory push to limit the trading of over-the-counter derivatives will hit the one part of the trading business that is most likely to remain in human hands," writes Smith. The movement toward passive investing, meaning each dollar of assets takes less time and effort to manage, will also squeeze asset management in the form of lower expense ratios:


In the wealth management arena the U.S. Department of Labor's new fiduciary rule will also reduce the commissions that advisers can earn. "Fee compression will drive asset managers to become larger-volume, lower-margin businesses -- a common result in many industries disrupted by technology and restricted by regulation," writes Smith. "That implies a lot of wealth management firms bite the dust as the industry consolidates."