May 6 (Bloomberg) -- Regulators have determined that Bank of America Corp. requires about $34 billion in new capital, the largest need among the 19 biggest U.S. banks subjected to stress tests, said a person with knowledge of the matter. Bank of America rose 9 percent in early New York trading.

Citigroup Inc.’s shortfall is more limited because the company already plans to convert government preferred shares to common stock, people familiar with the results said. JPMorgan Chase & Co. doesn’t need a deeper reserve against losses, according to people familiar with that company’s result.

The banks may outline their strategies to add capital, or in other cases buy out government stakes, after the Federal Reserve publishes the stress tests results tomorrow. Companies requiring more capital could raise all the funds through conversions of preferred shares if they choose, the people said.

“To the extent that there are banks that need capital, our hope is that many of them will be able to raise that capital through either private equity offers, or through conversions and exchanges of existing liabilities,” Fed Chairman Ben S. Bernanke told lawmakers at a hearing in Washington yesterday. “The data we have are accurate reflections of the financial conditions of those banks.”

Banks that want to return money injected by the Treasury since October must show they can borrow from private investors without a Federal Deposit Insurance Corp. guarantee, according to people familiar with the matter.

Repayment Conditions

The Treasury will unveil conditions for repaying the Troubled Asset Relief Program money as soon as today, the people said on condition of anonymity. Banks generally must apply to the Treasury and secure permission from their bank supervisor in order to pay back the government. So far only a handful of smaller banks have done so.

Bank of America spokesman Scott Silvestri in Charlotte, North Carolina, declined to comment. Analysts’ estimates of the company’s shortage of common equity have ranged from zero to as much as $100 billion.

Chief Executive Officer Kenneth D. Lewis declined to discuss the stress tests at Bank of America’s annual meeting last week, citing the Fed’s instructions to banks. He said April 20, responding to an analyst’s question, that the company doesn’t expect to require additional capital.

Lewis, 62, was ousted as chairman on April 29 after shareholders rebelled against management’s handling of the Merrill Lynch & Co. takeover. Bank of America was down 96 cents at $9.88 in early U.S. trading.

Citigroup’s Steps

Bank of America is considering selling part of its stake in China Construction Bank Corp. immediately instead of in a few weeks time, the Financial Times reported today. A lockup on the stake expires tomorrow. Bank of America can sell as many as 13.5 billion shares of China Construction, or 6 percent of the Chinese lender’s outstanding shares traded in Hong Kong, on May 7, according to an earlier agreement.

While Citigroup has received the biggest rescue so far among commercial banks, it has taken steps in recent weeks to bolster its capital. The New York-based company plans to get a $2.5 billion boost to tangible common equity, or TCE, from selling brokerage and investment banking units in Japan. It’s also pushing to complete a venture with Morgan Stanley ahead of schedule to lock in a $5.8 billion gain, people familiar with the matter said.

Citigroup spokesman Stephen Cohen declined to comment.

Exchanging Preferred

JPMorgan Chief Executive Officer Jamie Dimon said April 16 that he could repay the New York-based firm’s $25 billion in taxpayer funds “tomorrow” and referred to the money as “a scarlet letter.” Repayment would free the company from compensation restrictions and other oversight.

JPMorgan spokesman Joseph Evangelisti in New York declined to comment.

People familiar with the matter said May 4 that about 10 of the 19 firms will be deemed to need additional capital. The number increased from six to eight a week ago, after regulators boosted their target for the reserves the firms must hold.

Officials favor tangible common equity equal of about 4 percent of a bank’s assets, up from an earlier target of 3 percent, two people with knowledge of the deliberations said last week.

By exchanging preferred for common, banks would be able to Increase their TCE, a measure of how much capital a firm has to withstand losses. The financial yardstick strips out intangible assets, goodwill -- the premium above net assets paid for acquisitions -- and preferred stock, including shares issued to the U.S. Treasury.

FDIC Guarantees

Along with JPMorgan, banks including Goldman Sachs Group Inc. and Bank of New York Mellon Corp. have sold debt without FDIC guarantees in the past month. Bank of New York Mellon said proceeds from its May 5 sale will be used to help repay the $3 billion capital injection it got from the TARP last year.

FDIC Chairman Sheila Bair has said banks need to wean themselves off the guarantees as financial markets heal from last year’s crisis. In March, the FDIC extended the time in which banks could issue government-guaranteed debt, while also announcing plans to raise fees on the program. FDIC spokesman Andrew Gray declined to comment on the TARP repayment policy.

The Treasury’s requirement is that banks must demonstrate an ability to borrow without the government guarantee and doesn’t affect outstanding debt, people familiar with the matter said. Goldman Sachs has said the firm doesn’t see a direct link between the debt guarantees and the Treasury’s capital injections.

Dividend Limits

“We still have some capacity under the FDIC-guaranteed at pretty attractive spreads,” said David Viniar, the New York- based company’s chief financial officer, in an April 14 conference call with investors. “We’ll continue to use that when it’s available, but we expect to continue to raise unguaranteed debt when it’s available as well.”

The Treasury and regulators have presented different options for the banks to shore up their books without taking taxpayer money, including selling assets, seeking private capital and converting previous government investments from preferred to common shares. Not including repayments, the Treasury has about $110 billion left in the $700 billion TARP.

For banks that need to deepen their reliance on government capital after the stress tests, officials may set limits on their dividends and political lobbying. While it’s unlikely to influence day-to-day operations, the government won’t be a “hands-off” investor and will take steps to ensure that management is “effective,” Bernanke told lawmakers yesterday.

“It’s obviously not our intention or desire to have long- term government ownership of banks,” Bernanke said at the congressional Joint Economic Committee. Still, he added that it would likely be a “few years” before banks can end their dependence on government capital.

Bank of America rose 98 cents to $11.82 at 9:14 a.m. in early trading.

To contact the reporter on this story: Rebecca Christie in Washington at rchristie4@bloomberg.net

Last Updated: May 6, 2009 09:16 EDT