Regulators urge BofA, Citi to boost capital

WASHINGTON -- The banks are making their arguments to regulators, said these people, who spoke on condition of anonymity because they have been ordered not to discuss it. Among their points could be that regulators don't fully understand the banks' operations, they said.

But the companies face an uphill battle in convincing Fed officials, who privately released the results Friday, that the results are wrong, analysts said. They noted that the tests are supposed to be rigorous enough for the results to be widely accepted.

Shares of Bank of America and Citi each dropped more than 5%. Wells Fargo, U.S. Bancorp, Bank of New York Mellon and others also dipped. JPMorgan Chase, American Express and a few more of the 19 banks tested by the government traded slightly higher.

Investors have grown more concerned about regional banks with many risky loans on their books. Defaults on those loans could skyrocket in a worsening economy. Banks that carry such loans, including KeyCorp and SunTrust Banks, are likely to be asked to improve their capital reserves, according to analysts.

"It's not surprising there are some slaps on the wrist or calls for recapitalization," such as at Citi or Bank of America, said Simon Johnson, a former IMF chief economist now at Massachusetts Institute of Technology's Sloan School of Business. "It's in keeping with their overall strategy" of waiting out the banking system's problems, he said.

Federal Reserve officials told reporters Friday that all 19 banks that underwent stress tests will need to keep an extra buffer of capital reserves beyond what's now required, in case losses continue to mount. That would mean some banks will likely have to raise additional cash.

But the Fed stressed in a statement that a bank's need for more capital reserves to meet the requirements should not be considered a measure of the "current solvency or viability of the firm."