The United States government, seeking to quell concerns about the nationalisation of America's ailing financial system, on Tuesday said it would provide increased support to banks that do not have an adequate buffer to survive in an even worse economy.

Federal Deposit Insurance Corp Chairman Sheila Bair said any additional steps to prop up the banking system will depend, in part, on a test to determine how the largest banks would fare in a more dire economic condition.

Bair said that a "stress test" for some 20 of the largest banks this week will help federal policy-makers determine "what type of additional capital investments the government may need to make".

If the test shows that banks need more capital and are unable to raise it privately, then the government might have to act, she said, speaking on CBS's The Early Show.

She cautioned against rushing to the conclusion that Washington plans to take over the industry, saying, "I think there's ambiguity in the word 'nationalisation'."

The reassurances came after reports that the US government was considering increasing its stake in Citigroup.

New administration will help

In an interview on ABC's Good Morning America, White House press secretary Robert Gibbs said the Obama administration is "going to help banks get through this crisis, but nobody imagines nationalising banks".

Meanwhile, Bank of America Corp Chief Executive Ken Lewis is reassuring employees that his company is not discussing a larger US stake with the government.

The memo, posted on the company's internal website Monday, is Lewis' latest effort to debunk rumours of nationalisation of the Charlotte, North Carolina-based bank.

Shares of Bank of America, along with Citigroup Inc, have taken a beating in recent weeks on the fear that the government might move to nationalise them as their loan losses mount.

Despite repeated insistence that it wants to avoid nationalisation, the government might move to expand its ownership stake in banks.

On Monday, the Treasury Department, the Federal Reserve and other banking regulators said they could convert the government's stock in the banks from preferred shares to common shares.

The strategy, which could be applied retroactively to banks that received money in the first incarnation of the bailout, would give the government voting shares and, therefore, more say in a bank's operations.

But it avoids, at least for now, having to tap more taxpayer money or resort to full-fledged nationalisation.

Wall Street responded Monday as it has with the roll-out of almost every other plan to fix the financial crisis, taking a big drop and sending the Dow Jones industrials to its lowest level in a dozen years.

Citigroup - perhaps the biggest name in American banking - has approached the regulators about ways the government could help strengthen the bank, including the stock conversion plan, according to people familiar with the discussions. They spoke on condition of anonymity because they are not authorised to speak on behalf of the government or the company. A Citigroup spokesman declined to comment.

The stock conversion could be available for other banks as well, the same sources said.

Creeping nationalisation

Citigroup already has received US$45 billion in bailout money, plus guarantees to cover losses on hundreds of billions of dollars in risky investments.

"What we are doing here is we're creeping our way toward nationalisation," said Terry Connelly, dean of Golden Gate University's Ageno School of Business in San Francisco.

Common shares absorb losses before preferred shares do, which means that under a stock conversion plan taxpayers would be on the hook if banks keep writing down billions of dollars' worth of rotten assets, such as dodgy mortgages, as many analysts expect they will.

On the other hand, common stock in banks is incredibly cheap, and taxpayers would reap gains if the banks come back to health and the stock price goes up.

Meanwhile, troubled insurer American International Group Inc. is looking to adjust the terms of its $150 billion government bailout, according to a report in The Wall Street Journal. The government's primary loan to AIG, totalling $60 billion, would be repaid with a combination of debt, equity, cash and operating businesses, according to the report, which cited anonymous sources familiar with the discussions.

The Federal Reserve Bank of New York, which is handling the government loan, declined to comment Tuesday on the report.

AIG said Monday it was working with the New York Fed to evaluate several alternatives to deal with its financial problems. The insurer also said it plans to provide a complete update on the government support when it releases fourth-quarter results, which is expected in the coming week.

- AP