Citigroup is locked in some intense negotiations with federal regulators over just how much capital it will have to raise. The big issue is whether assets sales (like the Nikko Cordial deal) and the expected exchange offers will be enough. Some think the bank will need up to $10 billion more. The issue may turn in part, notes the New York Times, on how much in future earnings gains regulators will allow banks to use toward its capital. As of now, "regulators are planning to let all 19 banks taking the stress test count, through the third quarter, any gains toward the cushion of capital they are required to hold against a worsening recession, according to people with knowledge of the plan."

So that would augur well for Citigroup and other banks on the bubble. But is this a bit risky? True, earnings were strong in the first quarter, but there's no guarantee they will remain strong. Bond price reversals can lead to one-time hits as well as one-time gains. We certainly don't want to be in a situation where bank capital adequacy has to be constantly re-evaluated. More details are coming this week. 

For more:
- here's the article

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