Government shouldn't tell banks how to lend: Paulson

WASHINGTON (Reuters) - Banks that receive government rescue funds must not hoard the cash, but the government should not tell the banks how to lend money, U.S. Treasury Secretary Henry Paulson said on Monday.

"The banks need to lend. They can't hoard capital," Paulson said in a CNBC television interview. "I do not believe it is proper or right for politicians or the government to tell banks whom to loan to and how to lend."

Paulson also said he was working with President-elect Barack Obama's team on asking Congress to release the remaining $350 billion in financial rescue money. The White House said earlier on Monday that Obama had asked President George W. Bush to request the remaining money and Bush had agreed.

Paulson noted that he has supported using the bulk of the rescue funds to add to banks' capital and said the Treasury has been working with the Federal Reserve to design programs that leverage funds from the program to help free up credit.

However, he declined to offer specific recommendations on how Obama should proceed.

"What's going to be done going forward, that's totally up to the next administration," Paulson said. "The notification we're going to be working through with Congress is on their behalf."

(Editing by Dan Grebler)