U.S. regulators are talking to Citigroup Inc about its capital levels after stress testing the bank, people familiar with the matter said, while The Wall Street Journal reported that Bank of America Corp may need billions in new capital.

The reports sent Bank of America and Citigroup shares down as much as 10 percent and 6.8 percent, respectively, and hit global stocks already shaken by fears about the spread of swine flu.

Both banks have been wracked by loan losses and writedowns on complex debt securities since the financial crisis began almost two years ago.

Their first-quarter results were better than expected but analysts have questioned whether the improvement can last given looming credit losses and the surprisingly high trading profits and one-time gains that boosted first-quarter results.

If you were to ask people last week which banks would most likely have to raise more capital I think Bank of America, Citigroup would have been the common answer, said Walter Todd, portfolio manager at Greenwood Capital Associates.

The pair have received $45 billion each in capital injections under the U.S. government's Troubled Asset Relief Program, more than any other major banks.

Investors likely already expected Bank of America and Citigroup to need more capital, Todd said.

To some degree their stock prices reflect a certain amount of dilution from issuing stock directly or converting preferreds, Todd added, noting this could explain why the shares did not fall further on the reports.

Bank of America shares were down 7.5 percent at $8.25, while Citigroup shares were down just over 5 percent at $2.92 on Tuesday afternoon. Earlier in the session, the shares fell as low as $8.00 and $2.86, respectively.

The cost of insuring Citigroup debt with credit default swaps rose 70 basis points to 615 basis points, while Bank of America's swaps widened by 25 basis points to 325 basis points, according to data from Phoenix Partners Group.

Citigroup can raise any additional capital it may need by adding more trust preferred shares to its planned exchange of up to $52.5 billion of government preferred shares for common stock, a person familiar with the matter said on Tuesday.

Both Bank of America and Citigroup, whose officials are objecting to the preliminary findings of the tests, plan to respond with detailed rebuttals, sources told the Journal, adding Bank of America's appeal was expected by Tuesday.

Bank of America spokesman Scott Silvestri did not return calls seeking comment. Citigroup spokesman Jon Diat said in an emailed statement that regulators have prohibited all financial institutions from making comments on the results of the stress tests until the final results are announced. A Federal Reserve spokeswoman also declined to comment.


Financial stocks more broadly were jarred by analysts' reports on Tuesday that other banks may also need to raise funds.

Wells Fargo & Co could need more capital, according to a client note from Deutsche Bank analysts, and regional banks may also need to bolster capital levels, Oppenheimer & Co analysts said in a report. The KBW Banks Index slid as much as 4 percent in morning trading before recovering most of its loss, and was down 1.7 percent at late morning.

Regional banks may be next to undergo scrutiny of their capital strength, according to analysts Terry McEvoy and Erik Zwick at Oppenheimer & Co. Higher exposure to commercial real estate and lower earnings power over the next two years indicate smaller banks may have a greater need to raise capital than the 19 banks in the government's stress test, the analysts wrote in a report on Tuesday.

Loan losses continue to get worse, charge offs continue to get worse, so of course they need to continue to raise capital, said Jon Fisher, portfolio manager at Fifth Third Asset Management.

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.

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, 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 immediate 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.

(Reporting by Ajay Kamalakaran in Bangalore; Additional reporting by Mark Felsenthal in Washington, Victoria Howley, Sitaraman Shankar and Steve Slater in London; Editing by John Wallace, Brian Moss and Matthew Lewis)