BofA and Citi need capital

Regulators have told Bank of America Corp it needs $34 billion of capital to withstand a deep economic downturn, as the U.S. government prepares to release results of industrywide stress tests.

The sum is roughly triple what the bank had been expected to need, an industry source familiar with results of the bank's stress test said. About 10 of the 19 large U.S. banks tested may need more capital, according to a person familiar with official talks on the subject. Citigroup Inc may need as much as $10 billion, a person familiar with the matter said.

The sources were not authorized to speak because the stress test results are not public. They are due late Thursday.

Analysts believe other banks that may need capital include Wells Fargo & Co, Fifth Third Bancorp, GMAC LLC, KeyCorp, PNC Financial Services Group Inc, Regions Financial Corp and SunTrust Banks Inc. Among the banks that may not are Bank of New York Mellon Corp, Goldman Sachs Group Inc and JPMorgan Chase & Co, analysts said.

If banks are required to raise more capital than expected, it may unnerve investors who had hoped the stress tests might show the industry was in less dire condition than feared.

But the release of test results should add more clarity about banks' health, and could prompt some investors who had been hesitant about investing in the sector to jump in.

Federal Deposit Insurance Corp Chairman Sheila Bair said she expects the results to be confidence instilling.

Meanwhile, other investors may buy bank shares because they had been betting on declines, and need to buy shares to cover their short positions.

In morning trading, Bank of America shares rose 90 cents, or 8.3 percent, to $11.74; Citigroup rose 21 cents, or 6.3 percent, to $3.52, and Wells Fargo rose $2.03, or 8.7 percent, to $25.30. The KBW Bank Index rose 7.3 percent.

PRESSURE ON CEO

The government has spent three months conducting stress tests on the 19 largest U.S. banks to determine their capital needs should economic conditions worsen more than many economists now expect.

It is unclear how Bank of America might raise capital, whether by selling assets, issuing more common stock or other steps. The largest U.S. bank has already received $45 billion of government help.

The stress test results are certain to increase pressure on Bank of America Chief Executive Kenneth Lewis, who was ousted as chairman last week in a shareholder vote. That ouster could also lay the groundwork for his departure from the company he has served for 40 years, including the last eight as CEO.

We know what Bank of America's problem is now, but we don't know what the solution is, said Ben Wallace, an analyst at Grimes & Co in Westborough, Massachusetts.

Bank of America spokesman Scott Silvestri, the Federal Reserve and the U.S. Treasury Department declined to comment.

Citigroup analyst Keith Horowitz wrote that banks may need to raise $75 billion of capital as a result of the stress tests, including $22 billion by Wells Fargo.

Wells Fargo opposed taking its initial $25 billion of government aid, and did not get government help in buying Wachovia Corp for $12.5 billion at year-end. But analysts have said it may need a greater cushion against loan losses, despite its having taken a big writedown when it bought Wachovia. The bank did not immediately respond to a request for comment.

BANK OF AMERICA'S OPTIONS

Bank of America is struggling with its controversial January 1 takeover of Merrill Lynch & Co as well as heavy credit losses.

Lewis told analysts on an April 20 conference call that we absolutely don't think we need additional capital, but added: Make no doubt about it, credit is bad, and we believe credit is going to get worse.

The bank could raise capital by selling some or all of its 16.6 percent stake in China Construction Bank Corp, that country's second-largest bank. Bank of America has also said it may sell its First Republic Bank business.

If it cannot sell enough assets, the bank might have to convert some of the earlier government aid into common stock, making the government one of its biggest shareholders.

Critics fault Lewis for failing in December to back away from the Merrill merger or disclose Merrill's sinking finances. Merrill later posted a $15.84 billion fourth-quarter loss.

Regulators are examining Bank of America's disclosures, as well as $3.6 billion of bonuses that Merrill paid out.

Lewis has said in testimony that he felt pressure from Bernanke and former U.S. Treasury Secretary Henry Paulson to close the merger, so as to not upset the financial system. Law professors and governance experts say Lewis owed a fiduciary duty to his shareholders first, not to regulators.

Bernanke on Tuesday told lawmakers he did not pressure Lewis to withhold information from shareholders about Merrill.

(Reporting by Karey Wutkowski and Jonathan Stempel; Additional reporting by Elinor Comlay and Dan Wilchins in New York; Mark Felsenthal and David Lawder in Washington, D.C.; Douwe Miedema in London; and Michael Flaherty and Parvathy Ullatil in Hong Kong; Editing by David Holmes and John Wallace)