By Alister Bull

WASHINGTON (Reuters) - U.S. Treasury Secretary Henry Paulson on Monday said that financial institutions should seize the opportunity to raise fresh capital if they think they need it, for both their own good and the sake of the wider economy.

"The big message that I am giving to financial institutions is that if you think there is any likelihood that you are going to need capital, and it is available today, go get it," Paulson said during a question-and-answer session after a speech to an economic policy conference.

"Because then it is better for you and the overall economy, much better than shrinking your balance sheet," he said.

Lenders have suffered multibillion-dollar losses from the crisis in the subprime mortgage market, which has also chilled U.S. growth and sparked a global credit crunch.

Paulson said that markets were adjusting, but warned that this healing process might be prolonged.

"It took some time to work up these excesses in housing and credit markets, so it is not surprising that it is taking some time to work through this," he told the conference, organized by the National Association of Business Economics.

"Market participants are adjusting. We're seeing disclosures. We're seeing them raise capital, which I think is very, very important; we're seeing them re-price risk," he told the audience.

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