Banks including Wells Fargo & Co., Bank of America Corp. and Citigroup Inc. could fuel a recession as their margins erode, Bloomberg reported.

A cut in credit ratings on $704 billion of bonds this year as a result of the U.S. housing market collapse may cause banks’ capital ratios to fall below a regulatory benchmark designed to maintain a minimum level of capital to protect depositors against losses. The result could be that the banks will no longer be considered well capitalized and will face more scrutiny from regulators and cut back on lending.

A bank cannot have more than 10 times its capital in risk-weighted assets to be considered a “well-capitalized bank” by U.S. regulators. More than 99 percent of American banks qualify as well capitalized.

Yet the world’s largest financial institutions have lost about $232 billion because of the credit crunch and have already raised $136 billion in capital and cut dividends, according to data compiled by Bloomberg. At the end of last year, regulated banks had a total risk-based capital ratio of 12.79 percent, based on data compiled by Bloomberg, which was the lowest ratio since 2000, before the last U.S. recession.

Citigroup had stock, retained earnings and preferred shares equal to 10.7 percent of its risk-weighted assets in 2007, down from 12.02 percent in 2005. Wells Fargo’s ratio was 10.68 percent, compared with 11.76 percent, and Bank of America’s was 11.02 percent, down from 11.08 percent. Bank of America’s capital ratio was affected by its October purchase of LaSalle Bank for $21 billion.