The US government has began a review of the viability of Wall Street's largest banks, but officials denied that nationalisation plans as President Barack Obama vowed to forge a well-regulated, vibrant financial system.
Wall Street stocks have plummeted over the last week to the lowest index levels in more than a decade, amid investor fears that the government could take controlling stakes in financial institutions on the verge of collapse.
Obama sought to allay the concerns about hefty government control after a White House meeting with top congressional leaders and his economic policy team to discuss an eventual overhaul of the US financial regulatory system.
"The choice we face is not between some oppressive, government-run economy or a chaotic and unforgiving capitalism," Obama said. "Rather, strong financial markets require clear rules of the road ...not to stifle but to advance competition, growth and prosperity."
Federal Reserve Chairman Ben Bernanke rejected the idea of nationalisation during a second day of testimony to legislators.
The US central bank head said the administration preferred to use public-private partnerships, which are temporary and involve taking only a portion of banks' shares in exchange for emergency government money.
Nationalisation involved completely shutting private shareholders out of the process; "we don't plan anything like that," Bernanke told the House Financial Services Committee.
A series of so-called "stress tests" of the country's 19 largest banks began Wednesday to decide how much more capital each institution might need to stay afloat and continue lending to consumers.
The US Treasury released details of the tests and its bail-out programme late Wednesday, insisting that any new stock purchases and capital injections amounted to a temporary guard for banks against future losses.
The programme "will be designed to give banks the incentive to redeem or replace the government-provided capital with private capital when feasible", the Treasury said in summary of the plan.
Some US economists and even politicians have suggested nationalisation may be the only option for banks in danger of bankruptcy amid the worst financial crisis since the Great Depression. The government is currently mulling whether to take an up to 40-percent stake in Citigroup Inc, according to US media reports.
Financial institutions are expected to lose more than $2 trillion in connection with the US' collapsed housing market, and the government has already injected hundreds of billions of dollars into banks to plug that gap.
In a speech Tuesday to Congress, Obama said his administration would likely need additional money beyond a $700-billion financial rescue package approved in October.
On Wednesday, he promised a major overhaul of the country's regulatory system to prevent another crisis of similar magnitude.
Legislation would be drawn up in the coming months to pull US watchdog agencies out of a "20th-century" regulatory structure that has shared blame for the devastating credit crisis.
"This financial crisis was not inevitable," Obama said, blaming both greedy investors on Wall Street and a failure by regulators to raise alarm bells about a growing housing bubble that ultimately collapsed.
The reform process will involve boosting transparency, simplifying financial products and ensuring that banks in the future maintain enough capital to withstand shocks to the system.
"If we once again guide the market's invisible hand with a higher principle, our markets will recover. Our economy will once again thrive, and America will once again lead the world in this new century as it did in the last," Obama said.