The Federal Reserve lifts asset size restrictions, Wells Fargo emerges from the shadow of scandal, and after-hours trading surged by 10% at one point

The Federal Reserve announced on Tuesday that Wells Fargo & Co. has met all the conditions required by the 2018 regulatory action, and therefore decided to lift the restrictions on its asset size. The Federal Reserve stated that it has completed its review of Wells Fargo's corrective measures, third-party assessment results, and its own review of the bank's corporate governance and risk management systems.

Driven by this news, Wells Fargo's stock price surged over 10% in after-hours trading on Tuesday. As of 5 PM Eastern Time, Wells Fargo's stock price was $77.35, an increase of 2.25%.

Media reports indicate that this unprecedented lifting of penalties marks the end of Wells Fargo's seven-year asset size restrictions imposed by the Federal Reserve, signifying a major victory for the bank's CEO Charlie Scharf and paving the way for Wells Fargo to reopen its growth path.

This highly anticipated decision also signifies the conclusion of nearly a decade of scandals for the fourth-largest bank in the U.S., meaning that Wells Fargo can once again pursue expansion. Since the restriction took effect in February 2018, it has become one of the most deterrent penalties in the banking industry. According to estimates, Wells Fargo lost approximately $39 billion in profits as a result.

Michael Barr, who stepped down as the Federal Reserve's Vice Chairman for Supervision earlier this year, stated in another announcement,

"Lifting the asset cap indicates that Wells Fargo has met the corrective standards, which is the result of focused management leadership, strong board oversight, and rigorous regulation working together. To maintain ongoing compliance, all three aspects must continue to be upheld."

However, the Federal Reserve also noted that other parts of the 2018 regulatory action will remain in place.

Wells Fargo has been embroiled in a years-long reputational crisis due to employees setting up fake accounts on a large scale. According to regulatory investigations, from 2002 to 2016, thousands of Wells Fargo employees opened approximately 2 million deposit and credit card accounts without customer authorization to meet sales targets, even forging signatures, creating fake email addresses, and registering unauthorized financial products. As a result, the bank was fined $185 million by U.S. regulators in 2016, and over 5,300 employees were fired.

As more violations came to light, Wells Fargo was accused of systemic management failures across multiple business lines. In 2018, the Federal Reserve unprecedentedly imposed an asset cap on the bank, prohibiting it from expanding its business until it completed governance reforms.

This was a significant measure taken by then-Federal Reserve Chair Janet Yellen during her final period in office. This penalty became the sole focus of investor attention, as it had long suppressed Wells Fargo's valuation since its implementation.

At that time, Wells Fargo's management had told investors that they hoped to complete the corrective work by the end of 2018. However, as the Federal Reserve repeatedly rejected its reform plans, market confidence gradually waned. Then-Wells Fargo CEO Tim Sloan resigned in early 2019, and the bank took six months to find a new CEO externally Since taking office at the end of 2019, Scharf has consistently refused to provide any predictions on when the asset cap will be lifted. His team submitted a remediation plan to the Federal Reserve in 2020 as the first step toward lifting the restrictions. This was followed by remediation execution and third-party evaluation, and Wells Fargo submitted relevant materials to the Federal Reserve last year