Paulson: TARP still needed for bank capital

Paulson, speaking to reporters on his last full day in office, hours after extending $20 billion in additional aid to Bank of America (BAC.N) defended his decisions in spending the first half of the Troubled Asset Relief Program funds.

"I think we've made real progress, but there are plenty of challenges and at least in my judgment, a good portion of the TARP resources are going to need to be used for capital programs," Paulson said.

Paulson said he was "encouraged" by Citigroup's restructuring progress. The struggling banking giant, which has required two injections of federal capital and an asset guarantee program, split itself into two parts -- one comprising its core commercial and retail banking business and another that includes brokerage and troubled assets.

"I think that the asset wrap we did for Citi and just closed, coupled with the capital injection and some of the other things, is giving them time to work through restructuring programs. We're all encouraged that they're making progress."

With the $20 billion in additional TARP capital for Bank of America, coupled with a federal backstop program for a $118 billion asset portfolio, the Treasury has overallocated the first $350 billion in the TARP fund by nearly $25 billion.

The U.S. Senate on Tuesday approved a request for the incoming Barack Obama administration to access the second $350 billion. Many lawmakers want the next tranche to be used more to help prevent foreclosures and spur more consumer lending.

Paulson defended the Treasury's decisions to shift TARP from a program to purchase bad assets to one that made direct investments in bank, saying this was "absolutely essential to financial stability."

Bank lending always declines in a recession, but the program has helped to prevent the availability of loans from declining further, he said.

(Reporting by David Lawder; Editing by James Dalgleish)