Updated from 12:17 p.m. EDT

Banks traded to the downside after a report that government stress tests have shown Bank of America ( BAC) and Citigroup ( C) may need more capital.

The Financial Select Sector SPDR, which tracks the financial stocks in the S&P 500, and the KBW Bank index were down 1.7% and 1%, respectively.

BofA and Citigroup were alerted by the government that they may need to raise more capital in light of the preliminary results of the so-called stress tests, The Wall Street Journal reported. BofA came up billions of dollars short, and both banks plan to contest the early results, according to the report.

Bank of America's annual shareholder meeting will take place on Wednesday. The California Public Employees' Retirement System, or Calpers, said it will vote against re-electing all 18 board members, including CEO Ken Lewis. BofA and Citi were among the worst performers on the Dow, losing 6.4% and 5.2%, respectively.

Deutsche Bank ( DB) shares were also moving after its first-quarter results. Germany's biggest bank said it returned to profit in the quarter after products in a number of areas showed stronger trading and sales volumes. However, CEO Josef Ackermann said the company sees continued challenges for 2009, and some analysts questioned the sustainability of the bank's results. Shares were recently 3.7% lower at $53.50.

Other banks trading to the downside include Wells Fargo ( WFC) and Bank of New York Mellon ( BK), which were recently losing 2.4% and 1.1%, respectively.

Bank of New York Mellon CEO Robert Kelly said on Monday at a session at the Milken Institute's Global Conference that he thinks the average bank is "healthier than most people realize," but that some will need "more capital over time."

"If on average the financial system is in pretty decent shape, let's get that news out," he said.

CIT Group ( CIT) spent another day in descent, losing 7.5%, or 18 cents, on higher than average volume.

JP Morgan Chase ( JPM) shares were rising 2.4%, and Goldman Sachs ( GS) was adding about 0.6%, recently.

Deutsche Securities initiated coverage on a handful of banks, including Wells Fargo, U.S. Bancorp ( USB), Fifth Third ( FITB) and First Horizon ( FHN), among others, with hold ratings.

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