Published April 20, 2009

US banks must rely on markets first for more money

No automatic new funds for banks after 'stress tests', signals Summers

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(WASHINGTON) Banks in the US that have received billions of dollars from the government will have to rely on private markets if they need more money, National Economic Council director Lawrence Summers says.

'The first resort for more capital is going to the private markets directly to raise equity,' Mr Summers told NBC's Meet the Press programme in remarks released yesterday.

His remarks signal that banks deemed in need of capital at the conclusion of government-run 'stress tests' may not get additional funds automatically. US regulators are reviewing the biggest banks to gauge whether they have enough money to survive a deeper economic slowdown. A Federal Reserve official last week said that the stress test results are planned for release on May 4.

The US Treasury at the end of last month had allocated US$328.36 billion under the Troubled Asset Relief Program (TARP), leaving US$134.5 billion for additional capital injections.

Some of the biggest US banks are already planning to give the government aid back. Goldman Sachs Group Inc and JPMorgan Chase & Co both pledged this month to repay the TARP funds after posting profits that exceeded analysts' expectations.

Mr Summers said that while the administration welcomes repayment, 'we don't want people to be paying back the government in ways that would put themselves right back in trouble, and leaving themselves with inadequate capital'.

For the top 19 banks, any repayment of TARP funds will have to wait until after the so-called stress tests conclude, a Treasury official said last week.

Separately, two of the Federal Reserve's top policymakers defended the Fed's emergency lending, saying that the programmes would not cause an inflationary surge or create 'significant' risk for taxpayers.

Vice-chairman Donald Kohn, speaking at a conference last Saturday in Nashville, Tennessee, said that the Fed has loaned to 'sound' borrowers and plans to disclose more about such credit. New York Fed Bank president William Dudley, speaking at the same event, said he was 'not worried at all that' a doubling in the central bank's balance sheet to US$2.19 trillion would spur inflation.

The increased credit has provoked concerns that prices will surge. Central bank officials are 'dramatically underplaying the risks and liability side of the balance sheet', former St Louis Fed president William Poole said in an interview at the conference.

'We are very vulnerable to an inflation explosion,' said Mr Poole, a senior economic adviser to Merk Investments LLC in Palo Alto, California.

Former Fed chairman Paul Volcker said that Congress will probably review the authority granted to the Fed following the expansion in its assets.

'I don't think the political system will tolerate the degree of activity that the Federal Reserve, in conjunction with the Treasury, has taken,' Mr Volcker, head of President Barack Obama's Economic Recovery Advisory Board, said in remarks to the conference at Vanderbilt University.

Central bank officials are 'underestimating the political forces they're going to face once the recovery starts', said Mr Poole, a contributor to Bloomberg News. -- Bloomberg