June 3, 2009 / 9:05 PM / 11 years ago

FDIC delays pilot sale of toxic bank loans

WASHINGTON (Reuters) - The Federal Deposit Insurance Corp said on Wednesday it has postponed its pilot sale in June of toxic bank loans, but said the overall program will continue to be developed.

FDIC Chairman Sheila Bair said banks have been able to raise capital without having to sell bad assets through the FDIC’s so-called Legacy Loan Program.

“As a consequence, banks and their supervisors will take additional time to assess the magnitude and timing of troubled assets sales as part of our larger efforts to strengthen the banking sector,” Bair said in a statement.

Bair previously said the agency aimed to launch the test sale in June and that it would be in the range of about $1 billion of distressed bank loans.

The loan purchase program is part of the bigger Public- Private Investment Program, which is designed to cleanse troubled assets from bank balance sheets.

The other part of the program, involving banks’ legacy securities, is still being developed, with plans to grant preliminary qualifications to fund managers early this month, a Treasury spokesman said on Wednesday.

Expectations about the overall toxic asset plan have been scaled back as banks have proven they can attract private capital without first cleansing balance sheets of a bulk of the troubled assets.

The toxic asset plan was once envisioned as the primary plank in the government’s plan to shore up the financial system in the wake of the bursting of the housing bubble and a global credit crisis.

U.S. Treasury Secretary Timothy Geithner said on Tuesday that improving confidence might lessen the interest of U.S. banks in the toxic asset plan.

Because banks are raising unexpectedly large amounts of capital from private investors, they may be able to sell more of their impaired assets in the market, Geithner told CNBC while on a visit to Beijing.

Many of the largest banks have raised billions of dollars in private capital this week, as they rush to meet a demand by regulators that they access public equity markets before being allowed to exit the government bailout plan.

But Geithner said the Obama administration would still work with the Federal Reserve and the FDIC to put asset-purchase programs in place as insurance.

The programs have also encountered some reluctance from potential investors, who fear lawmakers might restrict compensation or impose audits on their investment firms.

Reporting by Karey Wutkowski and John Poirier; Editing by Andre Grenon

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