U.S. regulator says bank toxic asset plan "critical"

WASHINGTON (Reuters) - The U.S. government's plan to use private capital and government money to cleanse banks' balance sheets of toxic assets is still "critical" despite some dampened expectations of the program, a bank regulator said on Tuesday.

John Bowman, acting director of the U.S. Office of Thrift Supervision, said policymakers still need to work through some significant issues, including soothing private investors' concerns about getting into business with the government.

"I still think it's a critical part of any recovery," Bowman said about the toxic asset plan during a briefing on the thrift industry's first-quarter earnings.

Bowman's comments came on the heels of remarks from U.S. Treasury Secretary Timothy Geithner, who said on Tuesday that their improving confidence may lessen U.S. banks' interest in the toxic asset plan.

Because banks are raising unexpectedly large amounts of capital from private investors, they may be able to sell more of their impaired assets in the market, Geithner told CNBC during a visit to Beijing.

But he said the Obama administration would still work with the Federal Reserve and the Federal Deposit Insurance Corp to put asset-purchase programs in place as insurance.

The Treasury announced in March details of the toxic asset plan -- known as the Public-Private Investment Program, or PPIP. It was envisioned as a way to make banks' balance sheets more enticing by removing so-called legacy assets that were scaring away private investors.

But as private capital has started flowing more freely to the larger banks, the program -- which has yet to launch -- is not seen as crucial.

Potential investors have also been scared that lawmakers may restrict compensation or impose audits on their investment firms, which is threatening to delay the FDIC's planned June pilot sale of toxic loans.

Bowman said policymakers must work through these issues but that there "shouldn't be any lessening" of the program's importance.

PRIVATE DOLLARS WANTED

Bowman, whose agency primarily regulates mortgage lenders, also said U.S. regulators have to look to private equity to buy failed banks' assets or take control over troubled financial firms.

The FDIC said last month that it is crafting guidelines for how private equity firms can invest in failing banks, after it orchestrated a sale of troubled Florida lender BankUnited to some of the most powerful private equity firms in the world.

Bank regulators are increasingly looking to private equity to provide relief for troubled banks. A sharp upswing in bank failures has reduced the FDIC's insurance fund to $13 billion at the end of the first quarter from $53 billion a year earlier.

The FDIC has said it wants to avoid having to tap its line of credit with Treasury to deal with bank failures.

"There's a limit on taxpayer dollars that are available," Bowman said. "I think we do all have to look at private dollars to come in."

He also said he is concerned that a massive amount of private capital is flowing to the largest U.S. banks in recent days, leaving smaller institutions at a disadvantage.

The 19 biggest banks have successfully raised billions of dollars through stock offerings in recent weeks after undergoing government-led "stress tests."

JPMorgan Chase & Co and American Express Co announced plans on Monday to sell $5.5 billion of common stock. Bank of America Corp said on Monday it raised $7 billion over six days and Morgan Stanley announced plans for a $2.2 billion equity offering.

Smaller institutions have not been attracting private capital with the same vigor.

"I think there is some concern about the differences in treatment of the investment community," Bowman said.

(Reporting by Karey Wutkowski and John Poirier; Editing by Gary Hill)