Competitive Strategies and Government Policies Paper
Maryna Lambropoulos, Trenton Acrey, Jose Esquivel & Jorge Benitez
ECO/365
January 7, 2015
Matthew Mulyanto

Competitive Strategies and Government Strategies Paper Wells Fargo & Company (NYSE: WFC) is a nationwide, diversified financial services company with $1.6 trillion in assets. Founded in 1852, Wells Fargo provides banking, insurance, investments, mortgage, and consumer and commercial finance through more than 8,700 locations, approx. 12,500 ATMs, online banking and asset management at wellsfargo.com, and mobile apps for mobile devices so you can access your accounts on the go. With headquarters located in San Francisco, Wells Fargo has more than 265,000 team members in 36 countries across our approximately 90 businesses. At the end of the third quarter 2014, Wells Fargo ranked fourth in assets among United States banks and was the world’s most valuable bank by market capitalization. In 2013, Euromoney named Wells Fargo “Best Bank” in its Global Awards for Excellence, the first time a United States based bank has won the top award. Wells Fargo Bank is one of the largest banks in the United States.
Prior to 2008 through 2010, WFB had many United States based competitors, but that number has decreased due to bank failures and mergers. The number of United States Banks fell by 12% between December 2006 and December 2010. During that same period, U.S. deposits held by the 10 largest banks rose from 44% to 49%. Wells Fargo has a vast range of competitors, but also has some of the smallest competitors who have one branch in a particular market. Wells Fargo is the 4th most significant United States Bank holding entity behind JP Morgan, Bank of America and CitiGroup. The top 4 bank institutions in the United States have been a result of several mergers due to synergies or enforced by the United States Federal Government during the Great Recession. New competitors hitting the market have not been the key driver for revenue and earnings pressure for Wells Fargo Bank. On the other hand, what has caused income, and earnings pressure is the existing low-interest rate environment, lack of visibility into the domestic and global economies, and unwillingness for consumers and businesses to borrow. As the largest residential loan provider in the nation, Wells Fargo relies heavily on the single-family market. A market that has had a difficult time finding its footing as the backlog of troubled mortgages have moved their way through the foreclosure process. In addition, a large proportion of credit-worthy homeowners chose to refinance mortgages at the lowest mortgage rates in this century and effectively stayed put in their current homes. The foreclosure crisis is now mostly behind us. The sudden onslaught of low-priced homes brought out investors that purchased a large proportion of homes in the main metropolitan areas. This helped establish a bid in many places where there previously was none and eventually sent home prices up well ahead of any material improvement in employment and income.
The market for rental housing has been where most of the action has been so far in this recovery. With investors rushing in to build apartments for younger individuals who are not yet ready to purchase a home and reconditioning older apartment complexes for those not in a position to buy a home. Although the apartment boom is now in full swing, it may be near a peak. Wells Fargo’s management expects the momentum in the housing market to shift more toward for sale housing in 2015. Foreclosures have decreased significantly over the past three years, but still remain above their long-run norm. Most of the problem, however, is confined to judicial states, such as Florida, New Jersey, Illinois, and Nevada, where the foreclosure process is much more burdensome and time-consuming. Florida and Nevada have both seen considerable improvements; however, foreclosures are no longer dominating the housing market as they were a few years ago.
The rise in foreclosures and the earlier slide in home prices have been major factors behind the turnaround in homeownership. The homeownership rate peaked 10 years ago and has tumbled 4.8 percent to 64.4 percent, falling to its lowest level in 19 years. The bank’s management team expects the homeownership rate to fall further and overcorrect due to the persistence of tight mortgage credit, changing attitudes towards homeownership and still stressed household balance sheets. Eurozone, China worries, and earnings pressures on world stocks can also create a lack of sustainability and predictability of the banks’ earnings. The speed, by which the Eurozone has again returned to its crisis, is unnerving. There are several reasons to think the recent panic may represent an opportunity for investors and institutions like Wells Fargo Bank. First, while Eurozone stocks have underperformed U.S. stocks significantly in this recovery, they have traded in a broad range relative to U.S. stocks since the fall of 2012 and currently reside near the low end of this range. Second, because of very different policy responses to the 2008 crisis (i.e., Eurozone policy officials initially addressed the crisis with fiscal austerity while U.S. officials immediately implemented monetary stimulus), it is believed the Eurozone economic recovery has been trailing the U.S. recovery by about two years and expect it to close the gap relative to the U.S. in the next couple years.
Third, economic conditions in the Eurozone have recently worsened which will likely force policy officials to introduce more aggressive stimulus soon at a time when U.S. policies are turning more restrictive. Finally, the U.S. dollar has recently strengthened substantially relative to the euro. The euro-dollar exchange rate is now near the lower end of a range, that has been in force for almost a decade. Consequently, U.S. investors can buy Eurozone stocks today with a reasonable expectation returns could be boosted should the euro revive some in the next year. The last large acquisition, the industry has seen, was the brokered merger by the FDIC where JP Morgan Chase acquired the failed assets of Washington Mutual pursuant to a bank run on behalf of their depositors. The merger between JPM and WaMu was back in 2008 and was the largest acquisition the industry had experienced. The purchase in the name of JMP resolves the greatest bank failure in U.S. history. The acquisition creates a level of attention on behalf of Wells Fargo’s management team and creates a level of awareness to a continued level of enhancement to products and services. Industry experts believe that banks will continue to face earnings pressure and may have to sacrifice credit quality by making loans with a higher chance of default to obtain the earnings shareholders and investors are seeking. Wells Fargo’s management is of the philosophy that sacrificing loan quality to build revenues that may or may not be off-set by loan loss reserves is not in the best interest of shareholders, investors, tax payers and most importantly the consumer. Over the last several years, federal regulators have begun to impose capital requirements on small, medium and large U.S. Banks in the form of Basel I, II, and III. Wells Fargo’s management team is working hand and hand with federal regulators to remain in compliance with the two primary principals of Basel III, Regulatory Capital and Asset and liability management. Basel III introduces a “Leverage Ratio”, the leverage ratio is the requirement that all amounts of assets and commitments should not represent more than 33 times the Regulatory Capital, regardless of the level of their risk-weighting and of the credit commitments being drawn down or not. The name Basel III is a crucial indicator that federal regulations have and will continue to hamper the operations of many U.S. Based Banks or Foreign Banks with U.S. based operations. The three different iterations have been a competitive advantage for the management team at Wells Fargo Bank. As small, medium and large competitors continue to address their capital, asset, and liability management issues, Wells Fargo has continued to obtain market share and dominance in the domestic and foreign financial markets. Global competition and the globalization of our client’s economies has contributed to the decisions made by management with regards to change in labor demand, supply, relations, unions, and rules and regulations in our chosen industry. Overt the last several years, the management team at Wells Fargo has implemented over 3,000 team members across the globe, customer support in over 120 countries, 53 global offices, and added branch locations in Dubai, Hong Kong, London, Singapore, Toronto, Taipei, and the Cayman Islands. By doing this, they have given us the ability to remain still competitive on a local level while providing services abroad.

References
Wells Fargo. (n.d.). Retrieved from https://www.wellsfargo.com/about/

Federal Reserve. (n.d.). Retrieved from http://www.federalreserve.gov/default.htm