Paulson Studying Europe's Pledge to Back Bank Debt

By Rebecca Christie

Oct. 12 (Bloomberg) -- Treasury Secretary Henry Paulson is studying Europe's plan to provide a backstop for debt issued by banks.

European leaders, at an emergency summit in Paris today, agreed to offer guarantees or insurance for senior bank debt, and to use government money to help big lenders stay solvent. The U.S. Treasury is studying the step and monitoring developments across the Atlantic, a Treasury official said in Washington.

Paulson has argued against a one-size-fits-all response to the global financial crisis, saying at an Oct. 10 press conference that ``individual countries are going to have different needs.''

Still, he has adjusted policy as the global credit crisis deepens and other nations announce programs to stabilize markets. Paulson said last week he would expand his plan to buy mortgage- backed securities and other bad assets from banks by putting more emphasis on Treasury purchases of equity in financial institutions.

Europe's policy announcement today may prompt Paulson to enact a similar program to back bank debt, said Vincent Reinhart, a resident scholar at the American Enterprise Institute in Washington and former director of the Federal Reserve Board's Division of Monetary Affairs.

``In open financial markets, it is hard not to match the actions of other governments,'' Reinhart said. ``Any delay in acting on asset purchases and capital infusions will force'' the Treasury to create a ``guarantee scheme to fill the gap.''

In announcing the debt-guarantee plan, the leaders of the 15 countries using the euro offered their most detailed battle plan yet for aiding crippled credit markets.

Neel Kashkari, the interim head of the Treasury's Troubled Asset Relief Program, is scheduled to speak tomorrow in Washington on financial markets and the Treasury's programs for reviving credit.

To contact the reporter on this story: Rebecca Christie in Washington at Rchristie4@bloomberg.net.