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Citi, Bank of America Targeted in Stress Tests

The Wall Street Journal reports today that Citigroup and Bank of America may need to raise more capital, based on recent government stress tests of financial institutions. The identities of troubled banks were supposed to remain confidential, but The Journal cites the usual “people familiar with the situation.” Regulators contend the need for Citi and Bank of America to raise more capital does not mean that either bank is insolvent, according to the article, but in Bank of America’s case in particular, the capital shortfall may total billions of dollars.

Executives at both banks are objecting to the preliminary findings, which emerged from the government’s scrutiny of 19 large financial institutions. The two banks are planning to respond with detailed rebuttals, these people said, with Bank of America’s appeal expected by Tuesday.

The findings suggest that government officials are using the stress tests to send a tough message to struggling banks. Bank of America and Citigroup have been the highest-profile problem children in recent months, but it is unlikely that they are the only banks the Federal Reserve has determined might need more capital.

Regional banks that made a lot of commercial real estate loans also are in trouble, The Journal reports.

It looks like the coming battle over the financial system will be about defining the difference between a “stressed” bank and a totally insolvent one — if it even exists.

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