U.S. Prepared to Inject Funds Into Banks Following Stress Tests

The U.S. government renewed its pledge to backstop the financial system and work to keep it in private hands as officials prepare to begin stress testing later in the week.

"The U.S. government stands firmly behind the banking system during this period of financial strain," the Treasury, Federal Reserve and other agencies said in a combined statement. "The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth."

On Wednesday, the U.S. government will begin stress testing banks to ensure adequate capital ratios. Banks that need additional funds will first have the chance to go to the private sector. If that fails, a "temporary capital buffer will be made available from the government," the statement said.

If the government invests in financial institutions, it will be in the form of convertible preferred shares, similar to recent investments in Citigroup and Bank of America. They will only be converted into common stock "as needed"

The statement indicates that the U.S. government believes many of its financial institutions are in a strong position.

"Currently, the major U.S. banking institutions have capital in excess of the amounts required to be considered well capitalized," it said.

The statement also seeks to clam worries of nationalization, saying the "strong presumption" of the stress-testing program is that banks should remain in private hands.

By Adam Button and edited by Stephen Huebl
©CEP News Ltd. 2009