U.S. Treasury Secretary Timothy Geithner said he would consider the health of the financial system and the flow of credit in deciding whether banks can repay bailout funds from the government, the Wall Street Journal reported on Monday.

In an interview published on its website, the newspaper said Geithner indicated the health of individual banks would not be the sole criterion for returning government funds.

We want to make sure that the financial system is not just stable, but also not inducing a deeper contraction in economic activity. We want to have enough capital that it's going to be able to support recovery, Geithner told the Journal.

Some large banks, including Goldman Sachs Group and J.P. Morgan Chase and Co have said they want to repay the government, but some fear that this would highlight difficulties at institutions that are deemed by financial regulator stress tests as needing more capital.

Geithner's comments echoed those of some other Obama administration officials, including White House economic adviser Lawrence Summers, who said on Sunday the administration wants banks to repay funds that came from taxpayers, but not in ways that will put themselves right back in trouble and leaving themselves with adequate capital.

Geither told the Journal he has tried to make a simple case to lawmakers and others why taxpayer funds were needed to aid the financial system.

You can't have economic recovery without a financial system, Geithner told the Journal. Without a financial system you have no credit, which means higher unemployment, lower production capacity and a higher number of failing institutions.

Geithner also said he would reiterate the need for a strong and broad global consensus on stimulus, financial repair and quick deployment of resources to emerging economies later this week when Group of Seven finance ministers meet in Washington.

EQUITY CONVERSIONS AN OPTION

Also on Monday, a Treasury spokesperson said converting the government's existing preferred stock investments in banks to common equity was being considered as one of several options that would enable the U.S. Treasury to shore up bank balance sheets after the stress test results are disclosed May 4. However, the spokesperson added no decisions have been made.

Other options include encouraging banks to raise private capital, purchasing new preferred shares in them that are convertible into common equity, and asking them to sell troubled assets into a new public-private partnership program.

We have not endorsed one option over another, all of the those options have been on the table from the beginning and the needs of each bank will determine what the best approach is for each bank, the spokesperson said.

Conversion of preferred shares to common equity could increase a bank's capital cushion without using new taxpayer cash, amid dwindling resources from the $700 billion U.S. financial bailout fund.

This was a key part of the latest rescue package for Citigroup in February, in which the government agreed to convert up to $25 billion in preferred shares to common stock. The move increased tangible common equity, which bank regulators see as the strongest form of capital -- effectively the cushion left after all creditors and preferred shareholders have been paid off.

However, such moves would increase repayment and dilution risks for taxpayers, subordinating them to the same status as other common shareholders.

(Reporting by David Lawder, Editing by Chizu Nomiyama)

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