Citigroup ( C) may already be well on its way to raising the capital the federal government thinks it needs to, but it may need to pick up the pace.

The Wall Street Journal reported on Tuesday that both Bank of America ( BAC) and Citi have been told by regulators they may need to raise more capital based on early results of the government's so-called stress tests, according to people familiar with the situation.

Executives at both banks are objecting to the preliminary findings, the newspaper reports, and the two banks are planning to respond with detailed rebuttals. BofA, which has a shareholder meeting scheduled for Wednesday, is expected to make its appeal immediately.

Citi wants the government to acknowledge its recent efforts to sell off businesses and raise capital, the Journal says. Harlan Platt, a finance professor at Northeastern University, says that asset sales are going to have to be a "significant piece" of any capital Citi raises.

"Seeing success they're having in the auto industry, they're going to take a very similar tactic with these 19 banks that are too big to fail," Platt says. The government is "going to light some fires under some butts and force people to sell off assets that have value as opposed to selling off assets that have limited value."

Citi has been slimming down its expansive businesses in efforts to rein in expenses since the credit crisis began, but under pressure from regulators and investors it has taken even more drastic steps as losses mount and capital became thin.

Early this year, Citi split itself into a good bank-bad bank structure in order to unload toxic assets and sell off non-core businesses. It also agreed recently to combine its brokerage operations under Smith Barney with Morgan Stanley ( MS), among other things.

According to the Journal on Tuesday, Citi has reached an agreement with Japanese bank Sumitomo Mitsui Financial to sell Nikko Cordial and parts of Nikko Citigroup. The deal is expected to be announced later this week.

Still others say that outside investors could come to Citi's rescue.

"There is still a lot of money out there," says Anthony Sabino, a private lawyer and professor of law and business at St. John's University, citing foreign sources of capital like petro-dollars, sovereign funds and those countries in the Middle East or Asia that may see opportunity in Citi.

But the struggling bank could be nationalized at this point if investors fail to come through.

The "most likely possibility" of capital, but also the "scariest" is "the United States government," Sabino says. "Now what form of capital injection it will take is still to be determined."

Reuters is reporting that Citi is in discussions with the U.S. government about its capital levels, but "if it needs more capital, it does not expect the government to provide it," people familiar with the matter said.

Yet the company may also be able to raise capital by changing the terms of its preferred shares exchange or adding to the exchange, Reuters said.

The company said in an emailed statement that its "regulatory capital base is strong," and that its previously announced agreement to convert preferred shares into common stock "will significantly improve our tangible common ratios."

"We continue to focus and make progress on reducing the assets on our balance sheet, reducing expenses and streamlining our business for future profitable growth," the email said.

Citi declined to comment regarding the Nikko deal.

Citi said in March that it planned to issue common stock in exchange for publicly held convertible and non-convertible preferred and trust preferred securities, which included the government and other large preferred shareholders.

It had originally planned to launch the offer earlier this month, but the company pushed back the date until after the stress tests were completed, it said in conjunction with first-quarter earnings results.

BofA's capital shortfall amounts to billions of dollars, people familiar with the bank said, according to the Journal.

Industry analysts and investors predict that some regional banks are also likely to be forced to raise capital. Analysts consider Wells Fargo ( WFC), KeyCorp ( KEY) and Regions Financial ( RF) are among contenders for more capital.

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