Geithner sees signs financial system is 'starting to heal'

Mr Geithner pointed to a drop in spreads for corporate bonds, lower risk premiums in interbank markets and cheaper default insurance on the biggest banks as evidence that fear in the financial system was abating. "These are all welcome signs, but the process of financial recovery and repair is going to take time."

Geithner sees signs financial system is 'starting to heal'

By Sarah O'Connor in Washington

Published: May 14 2009 03:00 | Last updated: May 14 2009 03:00

Tim Geithner, US Treasury secretary, said yesterday that "the financial system is starting to heal" as he pledged to recycle returned bank bail-out funds into small community banks.

Citing improving lending conditions, easing concerns about systemic risk and lower leverage at banks, Mr Geithner said "a substantial part of the adjustment process" for the financial sector was now over.

As some larger banks become confident enough to repay funds from the government's troubled asset relief programme, the Treasury will recycle that money into smaller banks with under $500m (€366m, £329m) in assets, Mr Geithner said. They will have six more months to apply for funds and the Treasury will also increase the amount of money they can access from 3 per cent of risk-weighted assets to 5 per cent.

"As in any financial crisis, the damage has been unfair and indiscriminate," said Mr Geithner in a speech to community bankers. "Ordinary Americans, small business owners and community banks who did the right thing and played by the rules are suffering from the actions of those who took on too much risk."

More than 90 per cent of the US's 8,300 banks are small or mid-sized. Some community bankers have complained that the government has focused too much on the biggest banks and paid too little attention to them as they struggle with the reverberations of Wall Street's crisis.

The US government has invested capital in the form of preferred stock in 300 small banks, although the vast majority of Tarp money has gone to the country's largest financial institutions.

A number of those large banks have said they intend to pay back Tarp funds, including Goldman Sachs, JP Morgan and Capital One Financial.

Mr Geithner pointed to a drop in spreads for corporate bonds, lower risk premiums in interbank markets and cheaper default insurance on the biggest banks as evidence that fear in the financial system was abating. "These are all welcome signs, but the process of financial recovery and repair is going to take time."

Stressing that in future he wants small banks to be insulated from the risks taken on by bigger and more complex institutions, Mr Geithner said he would propose a fund to support systemically important financial institutions in times of crisis, backed by those companies themselves.

"Our judgment is that it needs to be a separate solution where the burden of funding . . . [is] borne by the large institutions in a level proportionate to their size," he said .

There was strong support in Congress for a comprehensive overhaul of financial regulation, which the administration wanted to capitalise on, he said. "We want to move while the memory of the damage of the crisis is still acute."

He singled out the lightly regulated derivatives markets as one area that would need to be brought under tighter control.