US regulators are moving to impose tough conditions on banks that want to repay federal bail-out funds, requiring them to prove that they can issue debt without government insurance.

The Bank of America Building in Washington, DC. (Photo: AFP)

    This new requirement, which was confirmed by a senior US official, could deter some banks from trying to repay funds early. Banks have issued more than $300bn of debt insured by the Federal Deposit Insurance Corporation. Earlier, a second senior US official told the Financial Times that banks wishing to repay government funds may also be required to demonstrate that they can raise equity capital from private investors.

    The disclosure came as reports from the US suggested that regulators may require Bank of America to raise as much as $34bn in additional capital. The Financial Times reported on Wednesday that BofA - which already received some $45bn from the US government - was considering the sale of part of its stake in China Construction Bank, which would raise about $8bn.

    It also emerged that Citigroup will have to raise less than $10bn in fresh equity - and possibly as little as $6bn - after the stress tests. US regulators were believed to have told Citi, which has already been bailed out three times by the government, it might have to raise up to $10bn to bolster its balance sheet.

    People close to the situation said the authorities had taken into account the fact that Citi had agreed to two disposals that would raise up to $9bn in common equity, thus reducing its need for extra capital. Citi, which declined to comment, is likely to raise any extra capital by converting trust preferred shares held by non-government investors into common stock.

    The stress tests will effectively divide banks into four groups: those (if any) that need to raise additional capital to guard against the risk of a deeper-than-expected recession, those that need more equity but not more capital, those that have enough capital and those that have surplus capital even in the stress test scenario.

    Most of the 19 banks will fall into the middle two categories. Those banks told to increase their equity following the stress tests are expected to outline plans to do so on Thursday.

    Options include raising more equity, converting existing prefered shares - including government prefered stock - and selling businesses.

    Bankers said regulators appeared to have placed little weight on the strength of the industry's profits in their first quarter when deciding future capital requirements.

    Several banks had lobbied the Treasury and the Fed to use their first-quarter results as a guide to their future profitability but the authorities are believed to have concluded that those earnings were unsustainable because of unusually favourable market conditions.

    Officials have budgeted for $25bn in repayments of funds originally allocated under the Troubled asset relief programme (Tarp) over the next year, but the second official said "it could be significantly more than that".

    The disclosures came after Ben Bernanke, the chairman of the Federal Reserve, said demand in the US economy "may be stabilising" with consumer spending up and signs of a bottoming in the housing market, though he said the evidence of overall stabilisation was still "tentative".

    Goldman Sachs and JPMorgan Chase - two banks that are likely to pass the stress tests without requiring additional capital - have already raised non FDIC-guaranteed debt. Their executives have argued they are ready to repay Tarp as soon as the regulators give them the go-ahead.

    Morgan Stanley has said it wants to repay Tarp but it has yet to issue non-government backed debt. The bank declined to comment on Tuesday but people familiar with the situation said its executives believed Morgan Stanley could raise non-government debt and did not see the new condition as an hurdle to Tarp repayment.

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