Bank of America at a Crossroads

Huge Growth May Hurt It as Regulation Looms

The last time Washington rewrote the rules of banking starting in the 1980s, it was a bantamweight company based in Charlotte, N.C., that mastered the opportunity, swallowing or surpassing rivals to become the nation's largest lender.

In 2006, at the apex of its golden age, Bank of America earned $21.1 billion.

Now, as the rules of banking are rewritten again, Bank of America may face the greatest struggle to adjust. The company's sheer size, long its greatest advantage, increasingly looms as a liability. The U.S. government has shown a growing determination to penalize large banks for posing inherently greater risks to the economy.

Regulators and legislators also are pushing Bank of America and its rivals to retreat from the practice of luring customers with cheap loans and services, then racking up profits with hefty penalty fees and interest-rate increases.

And the company, which historically took pride in making business decisions with little regard for political winds, now finds itself beholden to the government after accepting billions of dollars in federal aid to survive the financial crisis. The harsh glare of that spotlight contributed to the decision of chief executive Kenneth Lewis to announce Wednesday that he will retire at the end of the year.

Bank of America is the largest of a triad of banks, together with J.P. Morgan Chase and Wells Fargo, that dominate the landscape of American banking. Together the companies now hold about a third of the nation's deposits. They sell roughly half of all new mortgages and issue about two-thirds of all credit cards.

Policymakers increasingly are concerned that the consolidation could raise the price of loans and other financial services. They also worry that the companies will take larger risks in the confidence that the government will not allow them to fail.

The resulting pressure has led some financial analysts to suggest that Bank of America and other titans will be forced to break into smaller pieces. Others simply doubt that the companies will ever recover their former profitability, suggesting that the situation facing banks will resemble that of power companies -- heavy regulation, light profits.

A Bank of America spokesman said the company knows it must change, but believes it can continue to outperform its rivals.

"There's no doubt that some of the changes in regulation at least in the short run will cost us revenue," said the spokesman, Robert Stickler. "It's not a question of looking at the model and saying that it's not going to change. We're working aggressively to change. We are looking at the fact that we are not going to be able to make as much money the way we were and so we need to get to another model."

Retail Empire

Bank of America built its empire on retail banking. It assembled a network of more than 6,000 branches, stretching from Key West, Fla., to Forks, Wash., that allowed the bank to soak up 13 percent of the nation's deposits. The vast pool of money supplied the bank's lending. It also allowed the company to buy many of its competitors and funded massive investments in technology, including a Web site that remains the envy of its remaining rivals.

Shareholders prospered too. The company increased the annual dividend every year for 30 consecutive years, from 7 cents a share in 1977 to $2.40 a share in 2007.