Updated from Jan. 12

Securities regulators opened a formal investigation into the overstatement of a loan-loss reserve at SunTrust ( STI).

The Atlanta-based regional lender said late Wednesday that the Securities and Exchange Commission has issued subpoenas "seeking documents related to SunTrust's allowance for loan losses and related matters."

The issuance of subpoenas is an indication that the accounting discrepancy at SunTrust may be more serious than previously thought. Previously, the SEC had been conducting an informal inquiry.

The issue is a miscalculation in the bank's provision for loan losses in the first and second quarters of 2004. In October, SunTrust disclosed the problem and said it would have to restate earnings for those two quarters by $25.1 million, or 9 cents a share. The accounting issue led to the firing of three employees, including the bank's chief credit officer.

SunTrust executives, however, had sought to downplay the incident. The bank said it maintained a conservative credit culture, but acknowledged lax internal controls. The bank said an internal audit found "inadequate internal control procedures" and "a failure to detect errors in the allowance calculation."

The bank's review also found that the former employees "provided false draft minutes of an allowance committee meeting to the independent auditor."

SunTrust's problems, however, may not stop with the SEC.

Lehman Brothers bank analyst Jason Goldberg says he expects the Federal Reserve to look into the matter and possibly take action against the bank because of its weak internal controls.

"We expect its weakness in internal controls to lead to action by the Fed," says Goldberg in a research report.

Shares of SunTrust fell 50 cents to $69.87 in early Thursday trading. Goldberg says he expects SunTrust shares to lag the rest of the sector until the regulatory issue is resolved.