US Treasury Secretary Timothy Geithner said Wednesday that the financial system "is starting to heal" as a result of massive efforts to rescue banks and steady the housing market.
In a speech to community bankers, Geithner said the adjustment in the financial system has largely been accomplished as a result of government rescue efforts.
"The financial system is starting to heal," he said.
"Concern about systemic risk has diminished. And overall lending conditions have started to improve."
Geithner said this is reflected in easier borrowing conditions for corporate bonds and interbank lending as well as for mortgages, where interest rates dropped to a historic low.
"These are all welcome signs, but the process of financial recovery and repair is going to take time," he said.
Geithner said the system is responding to efforts by the Federal Reserve and Treasury to get more credit flowing and keep rates low, including moves to clean up so-called "toxic assets" that are weighing on banks' ability to lend.
Also important were the "stress tests" conducted on major banks, which he said would "bring greater transparency and new capital into the financial system."
"We have already seen a substantial amount of adjustment in our financial system. Leverage has declined. The more vulnerable parts of the non-bank financial system no longer exist," he said.
"Banks are funding themselves more conservatively. These are necessary changes, and there is more restructuring ahead for the financial industry as a whole. But a substantial part of the adjustment process is now behind us."
Geithner announced meanwhile that smaller banks -- with assets of less than 500 billion dollars -- would have a new opportunity to request US government capital injections.
He said this will be possible because of "the repayments we expect to receive from some of the largest banks."
He said the smaller banks would see the cap lifted on the injections to 5.0 percent of risk-weighted assets from 3.0 percent.
The actions were being take "to ensure your banks have the capital you need," he told the bankers gathering in Washington.
The Treasury has injected some 200 billion dollars in capital into dozens of banks out of a total program commitment for 250 billion dollars within the Capital Purchase Program of the Troubled Asset Relief Program (TARP).
A growing number of major banks are eyeing quick repayment of US government capital injections after "stress tests" showed major lenders are healthy enough to manage without public support.
Geithner noted that the administration of President Barack Obama would propose "comprehensive regulatory reform efforts" in the coming weeks for the financial system.
"We have focused initially on addressing systemic risk, making sure those risks that arise are less threatening to stability and that the government has tools necessary to contain the damage they pose to the American economy," he said.
Now, he said, the focus will turn to reform: "These changes will help prevent future crises and limit their severity."