Banks Won't Lend Until Confidence Returns: Kashkari

Capital markets must regain some stability before banks receiving government rescue funds will begin making loans again, the Treasury Department official managing the rescue said on Monday. (See Neel Kashkari's thoughts on the TARP program, left.)

"Although progress has been made in the last month, our capital markets remain fragile and confidence is still shaky," said Neel Kashkari, Treasury interim assistant secretary for financial stability, in prepared remarks to the Securities Industry and Financial Markets Association.

"As confidence returns to our institutions and our markets, we believe banks will put this capital to use by extending loans to creditworthy businesses and consumers," he said.

Congress passed a $700 billion financial rescue law in October. The Treasury plans to use $250 billion of the package, called the Troubled Asset Relief Program, or TARP, to inject capital into financial institutions to unfreeze capital markets and restore lending.

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Kashkari said the government's announcement earlier on Monday that it will buy $40 billion of preferred stock in struggling insurer American International Group was necessary to help stabilize the U.S. financial system.

In return, AIG must comply with limits on compensation for top executives, severance packages, bonuses, corporate expenses and lobbying, he said.

'We recognize that the financial system remains fragile and we continue to stand ready to prevent systemic failures,' he said.