Treasury Secretary Timothy Geithner on Tuesday urged lawmakers to support a proposal to charge big banks a fee to pay for bailouts and said it will make them less likely to engage in reckless lending.

The fee is designed to complement efforts to improve the stability of our financial system by providing modest incentives against funding riskier activities with less stable funding, he told the Senate Finance Committee.

Geithner stressed the fee, levied over 10 years and set at a level to fully recover costs of the government's Troubled Asset Relief Program, is not intended as a substitute for tougher capital standards.

He said it would complement broader financial reform proposals now under consideration on the Senate floor.

Geithner ran into skeptical questioning but not outright opposition to taxing banks, which are among the least popular industry groups among lawmakers.

He said the fee would restrain banks' risk-taking by making it more costly for them to take on big bets without having the assets to back them up.

The virtue of this design is...you can think of it as a too-big-to-fail tax, a tax on leverage, a tax on risk but its purpose...is to meet the legal obligation under the law to cover...(the state's) losses, Geithner said.

DUCKS VETO QUESTION

Proposals for a global bank levy ran into stiff resistance at meetings of the International Monetary Fund and Group of 20 last month, and Geithner's testimony showed the U.S. administration is still pushing on with some form of levy.

His appearance in the Senate comes amid a battle over Democrats' sweeping reform of financial regulation -- the biggest overhaul of banking since the Great Depression.

He dodged questions about whether President Barack Obama would veto any bill that would impose a bank tax but allow the funds to be used for purposes other than paying down budget deficits.

The president believes very strongly that the resources raised from this fee should go to cover the TARP costs and reduce the deficit...That's the president's position and he strongly believes that, Geithner said.

The $700-billion TARP program was set up while the financial crisis was raging and it was unclear how much would be needed to stabilize the financial system. Geithner noted that it has cost far less than feared, somewhere in a range of $109 billion to $117 billion.

We anticipate that our fee would raise about $90 billion over 10 years, and believe that it should stay in place longer, if necessary, to ensure that the cost of TARP is fully recouped, Geithner said.

He said Treasury was working with other governments that were considering a similar fee but didn't identify them.

The International Monetary Fund proposed a coordinated global bank levy to pay for future bailouts but some governments, including Canada, were vehemently opposed.

The Obama administration is pressing ahead with its own plan, which Geithner said it is trying to design in a way that improves the chances that other governments will adopt similar measures.

(additional reporting by David Lawder, Mark Felsenthal and Corbett Daly)

(Reporting by Glenn Somerville; editing by Patrick Graham)

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