Wells Fargo's Stumpf Sees New Costs for Customers

Wells Fargo & Co. Chief ExecutiveOfficer John Stumpf said customers, not just the bank, will bearthe financial burden for U.S. regulations that cover servicesranging from home loans to credit cards.

“I can’t guarantee that we won’t pass on some of thosecosts,” Stumpf, 56, said in an interview at his San Franciscooffice. “We’ll try to tighten our belt and absorb some of thecosts of compliance, but some costs may change and customersmight pay for their financial services in new ways.”

Stumpf’s comments add to evidence that new rules mean newexpenses for consumers as banks make up for lost revenue andincreased costs. JPMorgan Chase & Co. CEO Jamie Dimon said July15 the legislation may translate into higher fees and credit-card rates, and Bank of America Corp.’s Brian T. Moynihan toldshareholders a day later he’s looking for ways to soften theimpact on annual revenue, which the lender said could be $2.3billion.

Wells Fargo, with the biggest U.S. branch network, isalready passing on costs by charging for checking accounts andraising interest rates on credit cards and loans, said Richard Bove, a banking analyst at Rochdale Securities LLC. The bankended free checking last month by adding a $5 monthly fee forcustomers who don’t meet certain conditions.

“This bank does not intend to sit there and get nailed,”said Bove, who recently upgraded Wells Fargo shares to a“buy.” “Wells Fargo has moved well ahead of the crowd, andeveryone will follow.”

New Rules

President Barack Obama signed into law last week a 2,300-page overhaul of financial regulation that gives the governmentauthority to unwind failing financial firms, imposes new ruleson derivatives markets and creates a consumer-protection agencyto monitor loans and services. Stumpf said it’s too early tojudge the costs for Wells Fargo, in part because the bank islooking for ways to offset expenses and lost revenue.

Even with the bill’s shortcomings, Congress got many partsof it right, Stumpf said in the July 22 interview. The creationof a systemic risk regulator will prevent another crisis frombeing sparked by the collapse of a large financial firm, hesaid. The Financial Stability Oversight Council, a super-regulator, will monitor Wall Street’s largest firms and othermarket participants to spot emerging systemic risks.

“Too-big-to-fail has been dealt with,” said Stumpf, whosebank holds $1.2 trillion of assets. “Regulators needed a way tounderstand risk at the top of the house and opine on that risk.They did it in a way that makes a lot of sense.”

Not Enough

Some of the new consumer protections don’t go far enoughbecause they contain too many exemptions, Stumpf said. Autodealers and banks with less than $10 billion in assets may beexempt from some curbs.

Consistent consumer protection rules are “good forAmericans and it’s good for us as providers because we know theplaying field is level,” Stumpf said. “Does it become lesslevel because the consumer-protection agency has directinvolvement with certain companies and not others, and will relyon other regulators to do it? I don’t know. That’s where thetrickiness comes up.”

Wells Fargo, which ranks fourth by assets and third bydeposits among U.S. banks, has dropped 20 percent since themiddle of 2007 when credit markets began to falter, comparedwith 17 percent through yesterday for New York-based JPMorganand 71 percent for Bank of America, based in Charlotte, NorthCarolina. New York’s Citigroup Inc. slid 92 percent.

Wells Fargo rose 18 cents to $28.25 at 9:35 a.m. in NewYork Stock Exchange composite trading. The biggest stakeholderis Berkshire Hathaway Inc., the insurance and holding companycontrolled by billionaire Warren Buffett.

Durbin Amendment

Stumpf singled out new curbs on debit interchange fees forcriticism. Under the so-called Durbin amendment, the FederalReserve gets authority to limit interchange, or “swipe” fees,that merchants pay for each debit-card transaction. The measurepushed by Senator Richard Durbin lets retailers refuse creditcards for purchases of less than $10 and offer discounts basedon the form of payment.

“That is a dispute between banks and merchants and itsomehow found its way into regulatory reform,” Stumpf said. Hetold analysts on July 21, “I don’t see how debit card feesbetween banks and merchants had anything to do with whathappened in the last couple of years.”

Stumpf isn’t the only financial leader voicing displeasure.Card industry executives say the legislation amounts to pricecontrols, and American Express Co. Vice Chairman Ed Gilligansaid June 15, before the language was finalized, that the Durbinamendment “provides no benefit to consumers.” The largestpayment networks, Visa Inc. and MasterCard Inc., also opposedthe amendment.

Derivatives

New rules on derivatives will mandate that swaps betweenbanks and major users like hedge funds and asset managers bebacked by clearinghouses. Stumpf said moving those trades toclearinghouses would help show the true size of the derivativesmarket, but doesn’t address what happens when a borrower doesn’tpay or a member of the clearinghouse collapses, he said.

“Somebody’s got to take the credit risk,” Stumpf said.His concern was echoed by Joel Telpner, a partner with the lawfirm Jones Day in New York, who spoke in a July 26 interview.

“Maybe we are creating new entities that are too big tofail and setting up a scenario in the future where we’re goingto be arguing and anguishing about bailing out theclearinghouses,” Telpner said.