U.S. stocks slumped, led by financial companies, as European Central Bank President Mario Draghi said substantial risks to the economy remain and the law forbids him from stepping up government bond purchases.

Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM) and Citigroup Inc. (C) retreated more than 3.1 percent on a report that large financial institutions will have to hold extra capital. Alcoa Inc. (AA) and Hewlett-Packard Co. (HPQ) declined at least 1.3 percent to pace losses in the Dow Jones Industrial Average.

The Standard & Poor’s 500 Index slipped 0.6 percent to 1,212.02 at 1:46 p.m. New York time. The benchmark gauge for U.S. equities gained 0.7 percent over the previous two days. The Dow lost 41.17 points, or 0.4 percent, to 11,825.22 today.

“It’s not all roses and candy,” Malcolm Polley, who oversees $1.1 billion as chief investment officer at Stewart Capital in Indiana, Pennsylvania, said in a telephone interview. “You have a stubborn debt problem in Europe. The level of distrust has been -- you guys say you have things fixed and then it turns out you don’t. Until it’s actually done, we’re not going to believe you,” he said. “For the large U.S. banks (SX7P), it makes sense that they would be asked to hold higher levels of capital. They are a systemically bigger problem.”

The S&P 500 has fallen 3.6 percent in 2011, poised to snap a two-year rally, amid concern about slower global growth as European leaders struggled to solve the region’s debt crisis. Financial shares had the biggest decline in the benchmark measure this year, tumbling 22 percent.

‘Forbids’

Equities slumped today as Draghi said the ECB can’t step up government bond purchases under its founding piece of legislation. “The treaty specifies very closely what our remit is, namely to ensure price stability in the medium term,” he told lawmakers in Brussels today. “The treaty also forbids monetary state financing.”

Earlier, benchmark gauges rallied as euro-area finance ministers held a conference call beginning at 3:30 p.m. Brussels time to discuss 200 billion euros ($261 billion) in additional funding through the International Monetary Fund and the mechanics of a so-called fiscal compact that was negotiated at a Dec. 9 European Union summit, according to two people familiar with the planning.

The first part of 2012 will be “risk off” as Europe’s sovereign-debt crisis roils markets, Mohamed El-Erian, chief executive officer at Pacific Investment Management Co., said in an interview with Tom Keene on Bloomberg Television’s “Surveillance Midday.”

Get More Serious

“This has been frustrating because Europe hasn’t done enough yet in a timely fashion to alleviate the uncertainty,” Hank Smith, chief investment officer at Haverford Trust Co. in Radnor, Pennsylvania, said in a telephone interview. His firm manages about $6.5 billion. “Hopefully we won’t see a situation in which the market, by dramatically increasing the cost of funding, forces European leaders to get more serious.”

A gauge of financial shares (S5FINL) had the biggest decline in the S&P 500 among 10 industries today, falling 1.6 percent. The Federal Reserve is expected to embrace a new global framework that requires big banks to hold extra capital, the Wall Street Journal reported, citing people familiar with the situation.

Banks should be forced to reveal more data about their financial reserves so that they can’t conceal poor management decisions and excessive risk-taking, global regulators said. Lenders should “disclose the full list” of instruments that they are counting toward meeting their required minimum capital levels, the Basel Committee on Banking Supervision said in an e- mailed statement today.

Banks Tumble

Bank of America retreated 3.3 percent to $5.03. Citigroup slumped 4 percent to $24.98. JPMorgan tumbled 3.2 percent to $30.87.

Some of the biggest companies tumbled. Alcoa dropped 1.7 percent to $8.67. Hewlett-Packard declined 1.3 percent to $25.50.

Cablevision Systems Corp. (CVC) rose 3.2 percent to $13.16, the biggest gain in the S&P 500. The cable company was added to the Top Picks Live list at Citigroup Inc., which said the stock’s declines after earnings reports that missed analyst estimates and the departures of executives were “a touch extreme.” The company and Verizon Communications Inc. settled a lawsuit over ads that Cablevision claimed misrepresented its Internet speeds, a Verizon spokesman said.