US government officials must be careful not to "micro-manage" banks that receive capital injections from the US Treasury Department, a senior Treasury official said on Wednesday. Neel Kashkari, who administers the $700 billion Troubled Asset Relief Program which has invested in more than 500 institutions, said capital injections must be targeted at stabilising the economy.
But banks should not be pushed too hard to lend. "However well-intended, government officials are not positioned to make better commercial decisions than lenders in our communities," Kashkari said in prepared testimony before the US House of Representatives Oversight and Government Reform Committee.
"The government must not attempt to force banks to make loans whose risks they are not comfortable with or attempt to direct lending from Washington." Public opinion has soured on the governments efforts to rescue banks as the economy has continued to deteriorate and many businesses and consumers have trouble obtaining loans.
Kashkari, who was hired by previous Treasury Secretary Henry Paulson, was retained by current Treasury boss Timothy Geithner to run the TARP capital investment program on an interim basis. Kashkari said the actions taken by the Treasury last year to implement the TARP, along with actions by the Federal Reserve and Federal Deposit Insurance Corp helped save the US financial system from collapse.
"Had the financial system collapsed, this recession, including terrible job losses and numerous foreclosures, could have been far more severe," Kashkari said. He also said the government had no choice but to prop up several major financial institutions in recent months that posed systemic risks.
Kashkari noted that bank lending levels had held up "remarkably well" despite the worst recession in decades, and new procedures implemented by the Obama administration would require banks to indicate prospective use of government funds. "Without capital from Treasury, lending levels would likely have been much lower," he said.
Committee members were expected to press Kashkari for more details on transparency, accountability and measurable results. "Up until this point, policies have moved forward without a full accounting of toxic asset value or knowledge of where, how, why TARP dollars are being spent," said a spokesman for Rep. Darrell Issa of California, the panels top Republican.
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