US bank group says worried that Treasury overspent

WASHINGTON, Jan 7 (Reuters) - A top bank industry group said on Wednesday it is concerned that the U.S. Treasury Department has overspent available rescue money, leaving the capital injection program for the nation's banks underfunded.

The American Bankers Association said it is also worried that the Treasury has not set up a structure to let all eligible banks participate in the $250 billion capital program, leaving almost one-third of the banking industry out in the cold.

"We are not asking that more money be provided, just that the initial commitment be honored to assure fair treatment for all healthy banks and all communities," said ABA Chief Executive Edward Yingling in remarks prepared for a Congressional hearing on Wednesday that has been postponed.

Treasury did not immediately respond to a request for comment.

Treasury Secretary Henry Paulson said in October that "sufficient capital" had been allocated for the $250 billion capital purchase program and that "all qualifying banks can participate."

But Treasury has already over-allocated the first $350 billion of the $700 billion Troubled Asset Relief Program that Congress created in October.

The department has made pledges that total more than $354 billion, as it moved to rescue the U.S. auto industry and troubled financial companies American International Group Inc (AIG.N) and Citigroup (C.N).

Treasury must formally request the second allotment of the rescue funds, and Paulson said on Wednesday that it will be up to President-elect Barack Obama's team to decide how to spend the rest of the money.

In the meantime, ABA said it is worried that Treasury has not even come up with term sheets to allow for the participation of more than 3,000 banks that are set up as mutual savings banks and S-corporation banks.

In S-corporation banks, profits are passed directly to shareholders, who then pay taxes on the profits instead of the bank. They also have only one class of stock -- a sticking point for the capital purchase program, in which participating banks sell preferred stock to the government.

Yingling said mutual savings banks and S-corporation banks account for more than one-third of the banking industry.

"Furthermore, there are hundreds of banks that have applied for funding, met the required safety and soundness standards, and have received regulatory approval, but have not received funding," he said.

In its latest report, which covered the period ended Dec. 31, the Treasury said it had completed equity purchases in banks totaling $177.5 billion under the capital purchase program. (Reporting by Karey Wutkowski, editing by Gerald E. McCormick)