WRAPUP 7-US banks raise capital;Europe peers' bad debts soar

* U.S. banks race to fill $75 bln capital need

* Morgan Stanley, Wells Fargo sell shares at discount

* Financial stocks soar 12 pct on hope the worst is past

* Morgan Stanley, B of A sell non-guaranteed debt

* RBS Q1 bad debts quadruple to 2.9 bln stg (New throughout, adds comment, updates share prices)

By Elinor Comlay and Dan Wilchins

NEW YORK, May 8 (Reuters) - Morgan Stanley and Wells Fargo sold more than $15 billion of shares and bonds, as the two companies rushed to the head of the line of banks looking to raise funds following government stress tests.

Bank of America Corp (BAC.N) got in line too, saying it plans to sell 1.25 billion shares to help meet what the government deemed a $33.9 billion capital shortfall for the lender. Banks are hoping to sell shares fast, in case the soaring stock market starts to retreat, analysts said.

"If I were running a bank, I would sell stock now, too. It's a great time to ride the wave," said Joshua Siegel, managing principal at StoneCastle Partners, which owns Bank of America and JPMorgan Chase & Co (JPM.N) shares.

U.S. regulators late Thursday announced the results of its stress test of the 19 largest banks, and the relatively small size of the $75-billion capital shortfall heartened European and U.S. bank investors and emboldened issuers. [ID:nL8520410]

But the results also evoked skepticism among those who contend the tests were not rigorous enough.

The KBW index of U.S. bank stocks .BKX rose 12.1 percent. Bank of America, whose shares have risen more than fourfold since early March, closed on Friday up 4.9 percent for the day at $14.17.

Morgan Stanley (MS.N) sold $4.03 billion in stock Friday, including overallotment shares, while Wells Fargo & Co (WFC.N) sold $8.6 billion. Both deals were larger than expected, but came at discounts of more than 11 percent to their Thursday closing prices.

With the stress tests over, U.S. President Barack Obama's administration plans to focus on reforming regulation of the financial sector, including setting up a systemic risk regulator, sources told Reuters. [ID:nN08307480]

SHARES RISING

Despite the extra stock entering the market, Morgan Stanley's shares rose 3.9 percent to close at $28.20. The stress test said Morgan Stanley needed to boost its common equity capital buffer by $1.8 billion. [ID:nWNAB6722]