MercoPress. South Atlantic News Agency

US banks ready to repay bail-out money, but fears of further credit crunch

Ten of the largest US banks will be able to repay 68 billion US dollars in government bail-out money, the US Treasury says, a sign the financial crisis is easing. President Barack Obama welcomed the move but said it was not a sign that “our financial troubles were over”.

Banks have been eager to pay back the money to escape potentially onerous government restrictions, such as caps on executive pay. The banks received the money at the height of the financial crisis.

The Treasury did not name the banks that had received permission to repay the money from the 700 billion government bail-out fund, known as Tarp, set up in October.

But JP Morgan, American Express, Bank of New York Mellon, BB&T Corp, Capital One Financial, Morgan Stanley, State Street, Goldman Sachs and US Bancorp confirmed that they had received permission to pay back the money.

All these banks except Morgan Stanley and Northern Trust passed the US government's stress tests in May which assessed whether banks had enough capital to withstand further losses should the economy worsen.

Northern Trust was not subject to the stress tests and Morgan Stanley said it had raised extra funds.

President Obama gave a cautious welcome to the repayments but warned that problems in financial markets had not disappeared.

“This is not a sign that our troubles are over; far from it,” the president said. “The financial crisis this administration inherited is still creating painful challenges for businesses and families alike. But it is a positive sign.”

His sentiments were echoed by Treasury Secretary Tim Geithner.

“These repayments are an encouraging sign of financial repair, but we still have work to do,” said Mr Geithner said.

The repayments could boost the Treasury's depleted Tarp funds and could in theory be made available to other institutions that got into trouble.

“If these firms choose to do so, Treasury will receive 68 billion in repayment proceeds,” a Treasury statement said.

However, some observers fear premature repayment could stop the banks lending and thus undermine the chances of an economic recovery.

“Partly what that's telling you is that banks are spending all their money paying back the government and not doing what that money was intended to do, which was to stimulate the economy and lend that money,” said Marc Pado, US market strategist at Cantor Fitzgerald.

Others fear that the repayments could undermine the prospects of the banks that haven't been given the go ahead to repay the bail-out money.

“The focus is going to shift to those banks who are not repaying Tarp. This is going to put pressure on their stock price,” said Christopher Low, chief economist at FTN Financial.