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U.S. financial regulators today issued a joint statement on the status of the country's economy. The U.S. Department of the Treasury, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Reserve Board together said they stand behind the U.S. financial system as the linchpin in the recovery of the country's economy.

"The U.S. government stands firmly behind the banking system during this period of financial strain to ensure it will be able to perform its key function of providing credit to households and businesses. The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth. Moreover, we reiterate our determination to preserve the viability of systemically important financial institutions so that they are able to meet their commitments."

The statement also mentions the passage of the Capital Assistance Program which is designed to ensure banks are appropriately capitalized with "high-quality" capital. This goes into effect Feb. 25 and provides banks with an additional cushion against larger-than-expected future losses. Banks will be assessed under a more challenging economic environment. If it is deemed a bank needs additional capital, they may first turn to private sources. Otherwise, the government will make available to them a temporary capital buffer. The regulators say this temporary buffer does not imply a new capital standard, nor will it have to be maintained on an ongoing basis.

According to the statement, "Any government capital will be in the form of mandatory convertible preferred shares, which would be converted into common equity shares only as needed over time to keep banks in a well-capitalized position and can be retired under improved financial conditions before the conversion becomes mandatory. Previous capital injections under the Troubled Asset Relief Program will also be eligible to be exchanged for the mandatory convertible preferred shares. The conversion feature will enable institutions to maintain or enhance the quality of their capital."

The regulators say U.S. financial institutions are already properly capitalized and emphasize that this cushion is available in case of emergency. They also noted that banks function best when in the hands of the private sector. "This program is designed to ensure that these major banking institutions have sufficient capital to perform their critical role in our financial system on an ongoing basis and can support economic recoveryThe customers and the providers of capital and funding can be assured that as a result of this program participating banks will be able to move forward to provide the credit necessary for the stabilization and recovery of the U.S. economy. 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."

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