U.S. senators seek more bank injection guidelines

By Karey Wutkowski

WASHINGTON (Reuters) - A group of Democratic senators asked the U.S. Treasury Department on Wednesday to set guidelines saying that banks receiving government capital injections should use the funds to restore their lending activities to levels prior to the credit crunch.

The senators said in a letter that Treasury officials should also issue guidelines or best practices that specify the type of lending allowed, encourage loan modifications, and provide more oversight of executive compensation.

"Although we are supportive of your efforts to restore stability to the financial system through direct capital injections into financial institutions, we are concerned that if the program is not implemented correctly, its effectiveness will be limited," the letter said.

A Treasury spokeswoman did not immediately respond to a request for comment.

Sen. Charles Schumer from New York, Sen. Jack Reed from Rhode Island, and Sen. Robert Menendez from New Jersey said responsible firms should have no difficulty meeting new minimum standards, so adding them should not hinder participation.

The U.S. government in recent days has laid out a plan to inject $250 billion (154.4 million pounds) of capital into U.S. banks in exchange for preferred shares and some restrictions on executive pay. The program is part of a broader $700 billion market rescue plan Congress passed earlier this month.

Nine of the largest U.S. banks were essentially arm-twisted last week into signing on for the first $125 billion in capital infusions. The Treasury has set a deadline of November 14 for other firms to apply and has said it has enough capital allocated for all qualifying firms to participate.

"This plan will only be effective if these funds are used to increase lending by banks, and it is Treasury's obligation to ensure that," said Schumer, who chairs the Joint Economic Committee. "The last thing these banks should be doing is stuffing this money under the proverbial mattress."