Bail-out of US banks will cost $200bn less than predicted

The final cost of the US government's bail-out of the banking sector is expected to be $200bn lower than first thought.

The US Treasury will update its projections for the eventual cost of the $700bn (£425bn) Troubled Assets Relief Programme (TARP), a senior Treasury official disclosed.

As recently as August, President Barack Obama's administration had calculated the long-term costs of running the TARP would be $341bn, but the Treasury is now expected to cut that figure by almost $200bn.

That is in line with an estimate by the Congressional Budget Office from earlier this year, which estimated that the TARP – which has also been used to prop up General Motors and Chrysler – will end up costing American taxpayers $159bn.

The TARP was established by Hank Paulson, former US Treasury Secretary, at the height of the financial crisis in September 2008 to inject capital into banks to prop-up balance sheets, in return for preferred shares.

The positive news is a reflection of the recent increase in the number of banks and institutions rushing to repay their TARP facilities as a result of renewed confidence in the equity markets. Just last week, Bank of America (BoA) moved to repay the $45bn of TARP funds it had borrowed in two separate tranches, and Citigroup is now internally discussing the possibility of repayment.

To date, banks – not including BoA – have repaid $71bn, while the Treasury has earned an additional $10bn in interest payments.

American politicians are now turning their attentions to how else the money might be spent. Congresswoman Nancy Pelosi, the speaker of the House of Representatives, wants to use approximately $70bn of TARP funds to pay for a job creation plan. Timothy Geithner, the current Treasury Secretary, is said to be agreeable to such a move, though details are not yet known.