Bank of America needs to cover a capital hole of $34bn (£23bn), it will be revealed today, as the Obama administration unveils the results of "stress tests" to determine the strength of the country's financial system. But the bank insists it can raise most of the money by selling assets or issuing new shares, and says that converting taxpayer funds into common stock, a move that could make the US government its dominant shareholder, would be a last resort.
Results of the tests, carried out on the 19 largest US banks, will be announced after the market closes tonight. But 10 of them are understood to have been deemed to need an extra cushion of capital. The biggest shortfalls are at BofA, Citigroup and Wells Fargo bank. Citigroup may have to find up to $10bn of additional capital, reports say, while Wells Fargo could need $15bn (£10bn). American Express and JP Morgan Chase are understood to have been told they do not need additional capital.
The financial check-up is a key part of the administration's efforts to shore up confidence in the financial system. In essence, it measures the capacity of banks to withstand a continuing economic slump that might mean further heavy losses in areas like commercial real estate and credit card lending.
BofA's problems mainly stem from its acquisitions last year of Merrill Lynch and the mortgage lender Countrywide Financial. It has already received $45bn of taxpayer funds under the government's troubled asset relief programme (Tarp), but its chief executive, Ken Lewis, maintains it will not have to ask the government for any more.
Yesterday BofA executives said the capital requirement determined by the test was too high. But even if it remains at $34bn, they believe it can be largely covered by asset sales. First to go could be the bank's stake in China Construction Bank, valued at $8bn. Other possible disposals include holdings in Black Rock, the asset management firm, and First Republic bank.
Under Tarp, the government receives convertible preferred shares in return for the funds it injects into troubled banks. If BofA takes that route, and raises the full $34bn by converting such shares into common stock, the US would own 46 per cent of the bank. Such a step would probably throw the future of Mr Lewis into fresh doubt. The Obama administration has said it would change the top management of banks that receive "exceptional" aid from the government.
Today's report is expected to find that other institutions, including Goldman Sachs and Bank of New York Mellon, are properly capitalised, and thus in a position to repay Tarp money. But first they will have to show they can issue debt without the government guarantees extended last autumn, when the financial system was on the verge of collapse.