U.S. regulators have told Bank of America Corp and Citigroup Inc they may need to raise more capital following stress testing of the two banks, The Wall Street Journal reported.
The shortfall amounts to billions of dollars at BofA, the newspaper said on Tuesday, citing people familiar with the bank, adding it is likely the Federal Reserve will have determined other banks might also need more capital.
The report sent Bank of America and Citigroup shares down more than 6 percent in premarket trading and hit global stocks, already shaken by fears over the spread of swine flu.
European credit spreads widened, government bonds surged as investors sought safe-haven assets, and the dollar hit a near five-week low against the yen.
The U.S. stress tests are absolutely critical to where we are going, said Huw van Steenis, Morgan Stanley banking analyst in London. Not only are they crucial for share prices to work out how much dilution or not may come through, but the tests have also been introduced to try to improve the credibility of the system.
A Bank of America spokesman was not immediately available for comment. Citigroup declined to comment. A Federal Reserve spokeswoman also declined to comment.
Both banks, whose officials are objecting to the preliminary findings of the tests, plan to respond with detailed rebuttals, the sources told the Journal, adding Bank of America's appeal was expected by Tuesday.
It is likely that Citigroup and Bank of America are not the only banks targeted by the Federal Reserve, the Journal said.
Deutsche Bank analyst Matt O-Connor wrote in a note to clients dated April 27 that Wells Fargo & Co may also need to raise capital, along with Bank of America and eight other U.S. banks.
O-Connor conducted his own approximation of a stress test of the banks' tangible common equity to risk adjusted assets.
The Fed said last week the tests conducted at major banks were aimed at ensuring the institutions have enough capital in reserve to continue to lend in potentially bleaker conditions, and are not a measure of banks' current solvency.
Bank of America shares fell 8.7 percent to $8.14 and Citigroup shares fell 6.5 percent to $2.87 in premarket trading.
STRESS TEST DETAILS AWAITED
The government broadly outlined how it stress-tested the country's top 19 banks on Friday, but it disappointed investors who were looking for more details of how stringent the tests were.
The read across for the UK and Europe is a reminder that capital concerns about banks have not gone away, said Danny Clarke at UK stockbrokers Shore Capital.
He said it was difficult for investors to judge whether shortfalls would emerge at the U.S. banks without full details of the stress tests.
The chairman of Britain's financial regulator said on Monday that industry reform would be multi-faceted and include major changes to capital adequacy regulation, stoking worries the biggest banks will need to hoard extra capital.
The Fed has said most of the 19 banks have capital levels well in excess of the amounts required to be deemed well capitalized. However, it said heavy losses had lowered capital and choked off lending.
The results of the stress tests will be released during the week of May 4, and regulators hope that by outlining the methodology used, investors will have a way to gauge the results.
Some banks with too thin a capital cushion will have six months to find private funds; others may need to accept an immediately infusion of taxpayer money.
The 19 banks tested, which include JPMorgan Chase & Co and Wells Fargo, hold two-thirds of the assets and more than half of the loans in the U.S. banking system.
(Additional reporting by Mark Felsenthal in Washington; Victoria Howley, Sitaraman Shankar and Steve Slater in London, and Elinor Comlay in New York; Editing by Ian Geoghegan, Dan Lalor, John Stonestreet and John Wallace)