By Karey Wutkowski and Patrick Rucker
WASHINGTON (Reuters) - The George W. Bush administration may push for a global backstop of interbank lending along with a U.S. government program to buy shares of major banks in an effort to stabilize the battered financial sector and reeling markets.
Regulators have also discussed the possibility of giving an unlimited guarantee to bank deposits.
In recent weeks, banks have been unwilling to lend to one another, freezing global credit markets on fears that more major financial companies will collapse.
The U.S. Treasury Department and bank regulators have been working feverishly to craft policies that will restore confidence in the market and unclench credit markets, said several sources familiar with the discussions.
There are hopes that U.S. officials will announce a large-scale plan this weekend. The plan would likely be part of a coordinated global effort borne out of discussions with finance leaders from around the world. The G7 leaders were holding their meeting in Washington on Friday.
The idea of central banks providing a guarantee to interbank loans and the U.S. government becoming a shareholder in major banks has become the focus of U.S. policy-makers in recent days, said the government and industry sources.
In an address on Friday morning, Bush attempted to soothe markets.
"The federal government has a comprehensive strategy and the tools necessary to address the challenges in our economy," Bush said, as he specifically mentioned the government's power to buy a stake in financial companies.
Senior Bush policy-makers reiterated that message to U.S. financial services leaders during a conference call on Friday afternoon. A financial policy executive on that call said no specific government plans were discussed.
The U.S. banking industry is also warming to the idea of providing insurance for interbank loans -- an idea being publicly pushed by the British government -- especially if the insurance involves risk-based pricing.
However, there is still uncertainty about how many banks would take advantage of a Treasury plan to directly inject capital into the banks in exchange for passive equity stakes.
The banks fear an abrupt injection of government cash could startle investors who would likely see their stakes diluted. Also, it could send the signal that the banks are in worse condition that previously thought.
The end result could be a loss of confidence that nullifies the benefits of a capital injection.
Wayne Abernathy, executive vice president for financial institutions at the American Bankers Association, said what banks really need is a clearer idea of what U.S. government intervention plans may be.
"There's a fair amount of concern about the way things are put out there in a broad way without details, and with the impact the investor reaction has on the banks," Abernathy said.
GLOBAL PUSH
The bailout package, enacted early this month, authorized the Treasury Department to purchase up to $700 billion in soured investments from financial services companies to help them scrub their balance sheets and return to normal lending.
In the same move, Washington raised the limit on insured deposits from $100,000 to $250,000 in a bid to calm depositors who might have worried that their money could be lost in a bank failure.
Those initiatives, however, have not been enough to restore confidence to the markets or lenders, and policy-makers have returned to the drawing board.
There has been growing support among U.S. policymakers to push for a plan in which central banks around the world would guarantee the short-term loans that banks make among themselves.
"No one has ever done this before, but there could be coordinated insurance of those loans," said Alan Blinder, a former vice chairman of the board of governors at the Federal Reserve who is now an economist at Princeton University.
A Treasury spokeswoman said on Friday that the United States is reviewing a British proposal to guarantee interbank lending. She said the White House has already commented on a plan from British Prime Minister Gordon Brown calling for concerted action among major industrial powers to guarantee interbank lending.
Blinder said the program could work by having central banks charge a small premium to stand behind those interbank loans and losses would likely be small. "It could work like FDIC insurance," he said.
The Federal Deposit Insurance Corp has been discussing with other regulators the idea of lifting the limit on insured deposits -- another topic being discussed by global finance leaders -- but that action is being met with some resistance, even at the FDIC.
FDIC Chairman Sheila Bair has voiced some concerns about raising deposit insurance limits. She said there are "issues about moral hazard" because it removes a level of market discipline and could support more risky lending practices.
(Additional reporting by Emily Kaiser, Glenn Somerville, Mark Felsenthal and Doug Palmer; Editing by Chizu Nomiyama)
