Wells Fargo & Co. might need to raise tens of billions of dollars in new capital in order to satisfy government regulators concerned about its ability to survive a prolonged and severe recession, according to analysts studying the bank's financial health.

The San Francisco-based bank, which has 180 branches and 20,000 employees in Minnesota, is among 19 major financial institutions nationwide subjected to "stress tests" by the federal government to gauge how they would fare in a far worse recession than most economists expect. Banks have been scrambling for the past week to challenge the government's preliminary conclusions, so the Federal Reserve will release results Thursday, days later than planned.

While the government has said that no bank will "fail" the stress tests, Wells Fargo, Bank of America, Citigroup and others have already been told by regulators to raise more money as a buffer against future loan losses, according to reports from Associated Press and the Wall Street Journal. Peggy Gunn, a Wells Fargo spokeswoman, declined to comment Monday.

Under a doomsday scenario in which the economy deteriorates significantly, Wells Fargo would need to increase its capital by $66.3 billion in order to retain a tangible common equity ratio of 3 percent -- a minimum level sought by regulators, according to SNL Research, a Charlottesville, Va.-based analytics firm. A report last month from investment firm Keefe, Bruyette & Woods said Wells Fargo would need to raise $50 billion during the next two years, based on an assumption of the unemployment rate hitting 12 percent.

Just how Wells Fargo fills any capital shortfall is of considerable interest to investors. The bank could issue more stock or convert some of the preferred shares it sold to the U.S. Treasury to common shares; either would significantly dilute the value of existing shares and put more taxpayer dollars at risk, analysts say. More likely, Wells Fargo will seek to generate cash by selling assets, such as portions of its loan portfolio or business units, analysts said.

Still, Wall Street was less concerned about the stress tests Monday and more excited to hear that Warren Buffett, one of the nation's most respected investors and the bank's biggest shareholder, was buying up shares at current prices (as well as buying shares of Minneapolis-based U.S. Bancorp). Buffett called Wells Fargo "fabulous," and said it would do well regardless of the results of the stress tests.

His endorsement helped send the stock up 24 percent to close at $24.25 a share.

Wells Fargo holds billions of dollars in mortgage, construction and credit card loans. The stress tests have treated those loans as particularly vulnerable in a severe recession because more consumers would have difficulty repaying their debts. Wells Fargo also is heavily exposed to the commercial real estate market, another weakening sector of the economy.

Others less exposed

Other institutions, such as U.S. Bancorp, are relatively less exposed to troubled sectors and should be able to "earn their way out of this" without having to raise more capital, said SNL research analyst Derek Ferber. "It's impossible to paint everyone with a broad brush," he said. "Some will get through this just fine. But Wells Fargo is a little less clear than some others."

However, the doomsday scenario envisioned in the government's stress-test model is considered overly pessimistic by many industry observers, and Wells Fargo may be able to make the case to regulators that it can grow its way through the recession without having to raise large amounts of extra capital.

The adverse economic scenario outlined by regulators in its stress test assumes cumulative losses of up to 8.5 percent on home loans, 12 percent on commercial real-estate loans and 20 percent on credit cards -- all considerably higher than current levels, according to a Federal Reserve document disclosed to the Wall Street Journal.

The final results of the stress tests may be more the product of compromise than regulatory rigor, analysts said.

"There's a lot of politics in this process," said Mark Morgan, a bank analyst at Thrivent Asset Management. "If they come out and announce that huge amounts of capital are needed, it's somewhat contrary to their goal of instilling confidence in the banking system."

David Vang, chairman of the finance department at the University of St. Thomas, said he expects to learn Thursday that all 19 banks will have to raise more capital, although the amounts will not be extraordinary.

"This is well-intentioned political theatre," Vang said, "designed to show that our banking system is fundamentally sound."

Chris Serres • 612-673-4308