FDIC urges U.S. toxic asset purchase plan for banks

WASHINGTON (Reuters) - A top bank regulator said on Tuesday the U.S. government should return to its original plan to buy toxic assets from financial institutions.

John Bovenzi, chief operating officer for the Federal Deposit Insurance Corp, told lawmakers that "a key component" of the second half of the government's $700 billion financial bailout fund should be removing problem assets from the balance sheets of banks and related entities.

"Such a program is necessary to expand banks' balance sheet capacity to undertake new lending as well as to attract private equity investment," Bovenzi said in prepared remarks to the House Financial Services Committee.

The FDIC official's comments echo ones made earlier Tuesday by Federal Reserve Chairman Ben Bernanke. He said the government could consider buying troubled assets, providing asset guarantees, or setting up a so-called bad bank to take over assets in exchange for cash and equity.

Bovenzi told lawmakers the government's financial rescue efforts have not gone far enough and that troubled asset relief is necessary to get banks lending at more normal levels and to attract private capital.

"The FDIC believes that the original intent of the TARP -- to remove problem assets from the balance sheets of banks and related entities -- continues to be vitally important," he said.

Bovenzi laid out conditions for such a toxic asset purchase plan, saying participating banks should be required to develop executive pay programs and develop explicit plans to increase lending.

Banks should also be required to demonstrate "the capacity to raise additional private capital in significant proportion to the relief provided," Bovenzi said.

He said a major benefit of such a toxic asset purchase plan would give the government the power to restructure the troubled home loans it buys up.

But a broader loan modification program is still needed, Bovenzi said.

"Because of the sheer volume of troubled mortgages, as well as the large number which are locked in securitization trusts, it also is vital to institute a specific program aimed at foreclosure prevention," he said.

FDIC Chairman Sheila Bair has proposed preventing about 1.5 million foreclosures under a plan that would reward participating lenders by sharing the cost of defaults on restructured loans.

The FDIC estimated the plan could cost the federal government $24.4 billion out of the TARP. The FDIC proposal has been met with resistance from the Bush administration, which has said the TARP is supposed to be used for investing, not spending programs.

However, president-elect Barack Obama has been more supportive of a broad modification program. Obama on Monday sought the remaining $350 billion of the TARP funds, and pledged bolder action to tackle the rising home foreclosure crisis.

(Reporting by Karey Wutkowski; Editing by Neil Stempleman and Jeffrey Benkoe)