Geithner: Rules revamp needed to shield economy

WASHINGTON (Reuters) - Treasury Secretary Timothy Geithner said on Thursday U.S. regulations need to be revamped so the collapse of any single institution can no longer threaten the entire financial system.

"We do not want to put this country in the position in the future where we are vulnerable again, where the weakness in one institution causes the risk of great damage to the fabric of the American financial system," Geithner told the Senate Budget Committee. "That basic objective has to underpin everything we do on the reform agenda and we have to get it right."

U.S. officials have pledged to push forward with a revamping of the rules governing the financial system as a necessary complement to emergency efforts to prop up the financial sector and pull the economy out of a deep recession.

Geithner said he planned to roll out "a set of relatively detailed concrete proposals" on regulatory reform prior to testifying on the issue before a House of Representatives panel on March 26.

He will stress the twin goals of battling recession while erecting a bulwark against future crises at a meeting of finance ministers from the Group of 20 rich and developing nations near London this weekend. The officials are laying the groundwork for a leaders summit set for April 2.

The U.S. Treasury and Federal Reserve repeatedly have intervened to rescue ailing financial titans whose collapse they believed would damage the entire financial system and heavily damage the already suffering economy.

Earlier this month, officials expanded their bailout for ailing insurer American International Group (AIG.N) to $173 billion and late last month they reworked their emergency aid for Citigroup Inc (C.N) in which the government raised its equity stake to as much as 36 percent.

While he vowed to move to a system where such emergency measures would not be needed, Geithner defended the actions authorities have taken in recent months.

"The bottom line is we have to make sure, given the severity of this crisis and the fragility of the system, that we do everything necessary to protect against the risk that we have a disorderly failure of a major financial institution," he said.

Geithner cautioned that efforts to modify so-called mark-to-market rules, which require banks to mark down the value of hard-to-trade assets beyond what some see as a reasonable level, could have the unintended effect of undermining market confidence.

"We are in a period where investors do not have a lot of confidence in their capacity to judge the risks," he said. "We have to be very careful not to do things that would erode confidence in people's ability to assess the risks."

Geithner said some proposals might do just that, but that Securities and Exchange Commission Chairman Mary Schapiro was moving forward carefully as she considered ways the rule could be modified.

TOXIC ASSET PLANS STILL ON TRACK

Geithner vowed to move forward aggressively with measures to restore the flow of credit, which has dried up as banks have shouldered big losses on bad mortgages and other loans.

Last month, he sketched out plans for a public-private partnership to buy up toxic assets that are strangling bank balance sheets.

He made clear on Thursday his plan would seek to lever $1 trillion in financing in a program that would include the Federal Reserve and Federal Deposit Insurance Corp. Geithner said the program could be started with existing government resources under a $700 billion financial rescue program approved by Congress in October.

He said he would seek to limit risks to taxpayers, and that taxpayers would share in the upside should the assets gain in value.

"Recovery depends on getting credit flowing again. Without very forceful action to make sure banks have the ability to lend even in a deeper recession and without continued action to get these credit markets working again, then recovery will be undermined," Geithner warned.

(Additional reporting by Corbett B. Daly, Alister Bull and Mark Felsenthal; Editing by Andrea Ricci)