FDIC urges banks to disclose uses of federal funds

WASHINGTON (Reuters) - The Federal Deposit Insurance Corp on Monday urged its member banks to publicly disclose how they are using the billions of dollars of government capital injections and guarantees.

The FDIC issued a letter to more than 5,000 banks it supervises, encouraging them to say more about how the funds have supported prudent lending and helped homeowners avoid foreclosure.

The letter is not an order to the banks but strongly encourages them to comply with the FDIC recommendations.

"Given that government funds, capital and guarantees are being used to support banking institutions, banks are expected to document how they are continuing to meet the credit needs of creditworthy borrowers," the agency said.

The U.S. Treasury Department is injecting billions of dollars into banks in return for preferred shares and warrants under the $700 billion financial rescue package passed by Congress in October.

The government has also offered to guarantee up to $1.9 trillion in certain debts and deposits, and has engineered a number of rescue packages for troubled financial firms.

The programs have been met with sharp criticism from lawmakers and consumer groups who complain that banks are hoarding the cash instead of using it to extend credit to consumers or help distressed homeowners avoid foreclosure.

Congress is expected to attach more specific conditions on these financial stability programs before it releases the second half of the $700 billion Troubled Asset Relief Program.

Those conditions could include more restrictions on executive pay for participating banks and more specific language on how the banks are supposed to use the capital injections.

In the meantime, the FDIC said banks should be systematically collecting information about how they are using federal funds, and then present this information in shareholder reports and financial statements.

The FDIC provides deposit insurance for checking and savings accounts at its member banks.

(Reporting by Karey Wutkowski; editing by John Wallace)