WASHINGTON — Outraged lawmakers pressed Federal Reserve Chairwoman Janet L. Yellen on Wednesday to punish Wells Fargo & Co. for creating as many as 2 millions fake accounts, but she declined to commit to any regulatory penalties.
Yellen was testifying on the Fed's role in regulating the nation's banking system. She said the financial health of the financial system has strengthened considerably since the 2008 financial crisis, in part because of tougher regulations passed by Congress in 2010.
"Two million phony accounts. Break them up!" Rep. Brad Sherman, D-Calif., told Yellen during a hearing of the House Financial Services Committee on the Fed's regulatory responsibilities.
Sherman said Wells Fargo's problems indicated the giant San Francisco-based bank was too big to manage. He asked Yellen if she would "at least seriously consider breaking up Wells Fargo" using the Fed's authority to downsize banks that pose a risk to the financial system.
"We will hold the largest (financial) organizations to exceptionally high standards of risk management, internal controls and consumer protection," she said.
When Sherman said that the Fed hasn't been able to do that with Wells Fargo, Yellen responded that "we believe it is possible, even though it is extremely challenging."
When violations do occur, Yellen said that bank executives should face consequences.
"I think it is very important that senior management be held accountable," she said in response to questions from Rep. Stephen Lynch, D-Mass.
Lynch criticized the recent $185 million settlement with Wells Fargo that ended investigations into the scandal by Los Angeles City Attorney Mike Feuer, the U.S. Office of the Comptroller of the Currency and the U.S. Consumer Financial Protection Bureau because the bank did not admit any wrongdoing.
"If it didn't happen here, how we can even imagine ever that a bank might be required to take responsibility?" Lynch said. "It blows my mind that they're getting away with this and they're paying a little slap-on-the-wrist fine."
The OCC and the CFPB oversee Wells Fargo's retail banking operations, where the accounts were created without customer authorization.
The Fed supervises the parent holding company of Wells Fargo and the largest U.S. banks. Last week, Yellen said the Fed would look into the procedures at those banks to make sure they were complying with consumer protection laws and other regulations.
Yellen recommitted to that review Wednesday.
"We are undertaking a look comprehensively, not only in the consumer area but in compliance generally, because there has been a very disturbing pattern of violations," she said. Among the areas where those have occurred are mortgages and foreign exchange trading, Yellen said.
Rep. Michael Capuano, D-Mass., said Wells Fargo has faced 16 enforcement actions over the past five years, including an $85 million fine from the Fed in 2011 for mortgage lending abuses.
That fine was "laughable" to a bank the size of Wells Fargo, he said.
"Don't you think it's time the Fed does something?" in light of the recent scandal, Capuano asked. "How long does this stuff go on before you get outraged and take action?"
Rep. Maxine Waters, D-Calif., said "the enormous failure of risk management at Wells Fargo" could pose a threat to the financial system.
"Fraudulent retail banking practices may not, in and of themselves, pose systemic risk, but they surely indicate mismanagement that could be catastrophic in riskier and more complex divisions of a bank holding company," Waters said. "Supervisors and law enforcement must continue to hold both institutions and individuals accountable."
Wednesday's hearing signaled that Wells Fargo Chief Executive John Stumpf will face tough questioning on Thursday when he testifies at a hearing by the committee about the bank's fake accounts and aggressive sales tactics.
Yellen also said the Fed has no "fixed timetable" for raising interest rates but she believed the economy is ready for a rate hike by the end of the year.
She said that when the Fed met last week, a majority of her colleagues believed it would be appropriate to raise rates before the end of this year.
The Fed boosted its key policy rate in December 2015 to a range of 0.25 percent to 0.5 percent. But since then, officials have left the rate unchanged. Yellen told the lawmakers that she believed it would make sense to boost the rate again "if things continue on the current path and no significant new risks arise."
Information from the Associated Press was used in this report.