U.S. vows bank aid and aims to avoid nationalization

U.S. regulators promised on Monday to prop up struggling banks if needed and said lenders should remain in private hands, even as a source said Citigroup was in talks to give the government a greater stake, Reuters reported.

In Europe, the French government said it was pumping extra cash into two mutually owned banks, and central European central banks took the unprecedented step of talking up the region's currencies.

The Dow Jones industrial average, which started higher on the Citigroup talk, touched an 11-year low on fears that the bank stabilization plan would not be enough to keep the economy from sliding into a deeper hole. U.S. government bond prices rose slightly and the dollar gained against a basket of currencies as investors scrounged for safety.

Amid worries that the United States may still have to nationalize some of its banks, the Treasury Department, Federal Reserve and three other federal agencies said they will start examining large firms' capital needs on Wednesday to determine whether a bigger buffer is warranted.
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The money could come from the private sector or the government in the form of preferred shares that convert into common stock over time as needed to ensure banks have enough resources to withstand deepening credit losses.

"Because our economy functions better when financial institutions are well managed in the private sector, the strong presumption of the Capital Assistance Program is that banks should remain in private hands," the agencies said.

Healthy banks are vital to stemming recession. While some economists have argued that nationalizing weaker institutions would be the fastest way to revive lending, many investors -- particularly in the United States -- worry that government intervention would have a chilling effect on business.

"If the government tells the bank that they need more capital, it's highly unlikely any 'private' source would step up due to the stigma," said Andrew Busch, global foreign exchange strategist with BMO Capital Markets in Chicago.

"This means that the government's designation could signal a further death spiral for the bank's common stock shareholders," he said.

Citigroup, whose stock has been pounded by fears that the government may seize the bank and wipe out shareholders, was in talks to give the government a larger stake, a person familiar with the matter told Reuters.

The idea under consideration would involve converting a big chunk of the $45 billion (31 billion pounds) in preferred shares the government bought last year into common stock, putting as much as 40 percent of Citigroup into public hands.

The British government announced a similar move last month, saying it would convert preferred shares in Royal Bank of Scotland, which is expected to announce more restructuring this week.

France on Monday also reached out to its lenders, pledging up to 5 billion euros ($6.3 billion) in additional aid for Banque Populaire and Groupe Caisse d'Epargne.

The two mutual banks are expected to detail a merger this week and the new aid could give the government a stake of up to 20 percent in what is set to be France's second-biggest retail bank behind Credit Agricole.

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