Treasury sees signs financial rescues working

WASHINGTON (Reuters) - Spreads on key debt and other financial indicators point to the effectiveness of the Treasury Department's $700 billion financial rescue program, the official in charge of the program said on Thursday.

"One indicator that points to reduced risk of default among financial institutions is the average credit default swap spread for the eight largest U.S. banks, which has declined," Interim Assistant Secretary for Financial Stability Neel Kashkari told the Brookings Institution.

The Treasury Department had initially planned to use the fund to take distressed assets off bank books, but it has primarily used the program to take equity stakes in banks in an effort to increase their capital and spur further lending.

"The most important evidence that our strategy is working is that we have stemmed a series of financial institution failures," Kashkari said.

Congress created the $700 billion program in October, but Treasury currently only has authority to tap half of the funds authorized. It has already made pledges that total more than the money it currently has access to.

Treasury Secretary Henry Paulson said on Wednesday a decision to tap the final $350 billion would be left to President-elect Barack Obama.

Treasury would need to formally inform Congress that it plans to begin drawing on the final tranche, allowing lawmakers an opportunity to block the funds, before it gains access.

(Reporting by Patrick Rucker; Editing by James Dalgleish)