Bank of America Corp. wants out of a secret U.S. sanction imposed during the financial crisis, but regulators are keeping the 15-month-old penalty in place as they evaluate whether the giant lender is on solid footing again, said people familiar with the situation.
The debate about when the nation's largest bank by assets can be free of the confidential memorandum of understanding is currently the subject of negotiations between bank officials, the Federal Reserve and the Office of the Comptroller of the Currency, these people said.
It is a "reasoned disagreement," said one person familiar with the discussions.
As long as the memorandum is in place, Bank of America is subjected to intensified scrutiny from regulators and restraints on certain moves. The Charlotte, N.C., lender, for example, isn't allowed to raise its dividend as long as the memorandum hasn't been lifted, said people familiar with the agreement. It would also have to run other large decisions by regulators who, housed at the bank's headquarters, now have more oversight on day-to-day operations.
Regulators' reluctance to release the agreement quickly is yet another signal that U.S. minders are shortening the leash as they work to prevent future blowups at the nation's biggest banks. Regulators now are faster to slap banks with penalties and slower to set them free from crisis-era constraints, said people familiar with the U.S. actions.
The "pendulum," said one person close to the bank, is swinging from "the permissive side to the highly restrictive side." Regulators now "are super vigilant about everything."
The Fed and the OCC, which regulate Bank of America's holding company and banking units, declined to comment.
The conflict is likely to test the Bank of America's recent efforts to improve its relationship with Washington. Lifting the sanction is a priority for new Chief Executive Brian Moynihan as he attempts to shed the problems of the crisis and repair the bank's strained relationships with regulators.
Another benefit of lifting the sanction would be freedom from the memorandum's psychological stigma; it remains the most serious procedural action taken against Bank of America as a result of the financial crisis.
Such memorandums, which are rarely disclosed to the public, typically require banks to address specific problems, and companies that don't deal with deficiencies can be given harsher penalties.
People close to the bank thought Bank of America would be free by now, saying the bank has done everything asked of it by regulators.
Regulators aren't opposed to lifting Bank of America's agreement at some point, but people close to the bank said Bank of America has been told that this won't happen until regulators are satisfied that required changes made to governance, risk, capital and credit are permanent and can work over time.
The uncertainty surrounding the prospect of new industry capital requirements and a shaky U.S. recovery also are factors as regulators urge patience, one of these people added.
Regulators surprised Bank of America executives when they presented the memorandum in May 2009. The action followed a downgrading of the bank's ratings by the Fed and the OCC and repeated tussles with regulators over the bank's risk controls, capital levels and the purchase of troubled securities firm Merrill Lynch & Co.
The memorandum required immediate changes to the bank's governance, risk and liquidity-management policies. The bank promptly engineered an overhaul of its board, appointing seven new directors, and made a number of internal changes, ranging from how it classifies credit to risk- and liquidity-management controls.
Shedding the memorandum would sever one of the bank's last crisis-era constraints. Bank of America paid back $45 billion in U.S. aid in December and earlier this year settled an SEC lawsuit claiming that shareholders weren't alerted to ballooning losses at Merrill.
The bank, one of its current officers and former CEO Kenneth Lewis still face fraud charges from New York Attorney General Andrew Cuomo relating to a lack of disclosure around the Merrill losses.