The Fed's decision, which the bank disclosed in a regulatory filing Wednesday, makes Bank of America Corp. the only one of the four largest U.S. banks that wasn't able to raise its dividend, something shareholders have been clamoring for. It raised questions over whether the bank is strong enough to withstand another economic downturn.
For CEO Brian Moynihan, the rejection was another setback in his 14-month tenure, which has been marked by a sharp increase in lawsuits, mounting losses from credit cards and decreased income from checking accounts. As recently as March 8, Moynihan promised shareholders they would likely see a dividend increase in the second half of the year.
"We have the capital. We have the brand, and now we've been building the balance sheet," Moynihan said.
The Fed didn't agree.
Bank of America, along with the 19 largest banks in the country, was subject to a "stress test" in the first quarter. The Fed tested the banks' balance sheet and other measures to see whether they were strong enough to stand up to another economic downturn. Only banks that passed the test could increase dividends.
The Fed has now asked Bank of America to submit a revised plan, and it is unclear whether if it will be allowed to increase its dividend this year.
"This is a reality check for Bank of America," said Matt McCormick, a portfolio manager and banking analyst at Bahl & Gaynor Investment Counsel in Cincinnati.
Bank of America shares fell 1.7 percent to $13.65. Spokesman Scott Silvestri said the bank would resubmit its plan in the summer for a modest dividend increase in the second half of this year.
Moynihan will have to convince investors and the Fed that the bank is strong enough to weather another recession. At a time when the bank's profits and revenue are shrinking, it's not going to be an easy task.
Last week, the Fed cleared the way for several banks to increase their dividends -- including JPMorgan Chase, Wells Fargo, and Citigroup. They had been forced to cut dividends to preserve cash after the financial crisis that peaked in late 2008.