Regulators urge all banks to lend money

WASHINGTON (Reuters) - Treasury Secretary Henry Paulson and banking regulators said on Wednesday it was "essential" that U.S. banks make new loans based on prudent lending practices.

All banks, not only the those receiving government bailout funds, are required to adhere to the fresh guidance from Paulson, the Federal Reserve and the Federal Deposit Insurance Corp, the regulators said in a joint statement.

The regulators warned that if banks retreat from making sound credit decisions, the current market conditions may be exacerbated, leading to slower growth and potential damage to the economy as well as the long-term profitability of individual banks.

So far the Treasury Department has injected $115 billion into the eight largest banks, such as Goldman Sachs, in a bid to mend broken credit markets and restore health to the financial system. The government has earmarked a total of $250 billion for banks, including money for smaller, regional ones.

Banks receiving funds have come under fire from some Democratic lawmakers who say the institutions are hoarding the money rather than lending it.

Lawmakers have also urged Paulson to clarify that the government funds should not be used to acquire healthy banks or pay out dividends.

Banks should not maintain a level of cash dividends inconsistent with the firm's capital position that could weaken the firm's financial health, or that could impair its ability to meet the needs of credit-worthy borrowers, regulators said.

They also said banks' executive compensation plans should provide appropriate incentives for safe and sound transactions, not create incentives that can jeopardize the health of a financial institution.

Management should "structure compensation to prevent short term payments for transactions with long term horizons," the regulators said in statement.

Regulators said they expected banks to work with existing borrowers to avoid preventable foreclosures and mitigate other potential mortgage related losses.

Although Paulson and banking regulators described their statement as a set of guidelines, it carries the force of regulatory action.

(Reporting by Rachelle Younglai, Editing by Chizu Nomiyama)