updated 3/23/2011 4:35:55 PM ET 2011-03-23T20:35:55

It was one more blow for Bank of America: the Federal Reserve didn't allow nation's largest bank to increase its dividends.

The decision by the Fed 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.

The Fed's decision, which BofA disclosed in a regulatory filing Wednesday, also raised questions over whether the bank is strong enough to withstand another economic downturn.

For CEO Brian Moynihan, the Fed's 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 at a conference for investors.

Problem is, 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 if they were strong enough to stand up to another economic downturn. Only banks that passed the test were allowed to increase dividends.

The Fed has now asked the Charlotte, N.C., bank to submit a revised plan, and it is unclear if it will be allowed to increase its dividend in the second half of the 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, which manages about $3.2 billion in assets. "They have a lot of work in front of them."

Bank of America shares fell 1.7 percent to $13.65. Spokesman Scott Silvestri said in a statement that 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 because of new regulations, it's not going to be an easy task.

Last week, the Fed cleared the way for several banks to increase their dividends. They had been forced to cut dividends to preserve cash following the financial crisis that peaked in late 2008.

JPMorgan Chase & Co. said it would increase its quarterly dividend to 25 cents a share from 5 cents. Wells Fargo & Co. raised its dividend to 12 cents and Citigroup Inc. instated a quarterly dividend of a penny a share. Smaller rivals like KeyCorp and SunTrust Banks Inc. were deemed strong enough to repay their bailout money.

"It sets up Bank of America for a clear comparison with its peers and shows them wanting," said McCormick.

BofA's stock has lagged its competitors in the last year and has remained relatively flat so far in 2011. Investors have been worried that regulations enacted after the financial crisis will make it difficult for Bank of America to increase profits and grow many of its businesses, especially credit and debit cards. The bank has warned that it would lose at least $2 billion in annual revenue for a few years in its card business.

Last year, in Bank of America CEO Brian Moynihan's first year at the helm, its credit card unit took a $10.4 billion write-down due to new regulations and its home loan business struggled with fallout from the implosion of the housing bubble. The bank reported a 2010 loss of $3.6 billion.

Most of the bank's problems stem from its 2008 purchase of Countrywide Financial, which at the time was the country's largest mortgage company. While the deep slump in the real estate market has hurt all its competitors, Bank of America has been at the center of almost every controversy involving bad home loans.

BofA paid $2.8 billion late last year to the government-owned mortgage companies Fannie Mae and Freddie Mac to settle claims the bank sold them defective mortgages. In the fourth quarter, it kept aside $4.1 billion for more bad home loans that it could be forced to buy back from the two government agencies and other investors. It also set aside another $1.5 billion for litigation expenses related to bad mortgages.

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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