Paulson: More bank capital needed for recovery

WASHINGTON (Reuters) - Departing U.S. Treasury Secretary Henry Paulson said on Friday that continued capital injections for the U.S. financial system are needed to put the economy on a recovery path.

Paulson, in an interview with Bloomberg Television, said he believes that the U.S. economy faces "significant challenges" and will need a major stimulus spending plan and a healing of its credit markets.

"The financial system is going to be very important, until that is working the way it needs to work, it's going to be difficult to have a recovery," Paulson said.

Paulson said he has developed plans to recommend to his successor, Treasury Secretary nominee Timothy Geithner, to continue investments in financial institutions from the second half of the $700 billion Troubled Asset Relief Program (TARP).

"I believe that the main focus of the TARP is going to need to add capital to the financial system," he said.

Paulson said he previously resisted the idea of using TARP funds to help prevent foreclosure because direct investments in bank equity capital would provide "maximum bang for the buck" in terms of stabilizing the financial system.

"When I look at what we've done with the TARP authorities after receiving them with the benefit of 20/20 hindsight, I'm absolutely convinced they are the right things," he said.

He added that the Treasury will need to seek new authorities beyond TARP to ensure a sound financial system, such as a system for allowing large non-bank financial institutions to fail in an orderly manner. Such a system exists for bank holding companies to be taken over by the Federal Deposit Insurance Corp., but other firms face disorderly bankruptcies, he said.

(Reporting by David Lawder, Editing by Chizu Nomiyama)