U.S. regulators including the Treasury and Federal Reserve issued a joint statement saying the government stands firmly behind the banking system and said the government would ensure the banks had enough capital and liquidity to provide credit needed for economic growth.

Because our economy functions better when financial institutions are well managed in the private sector, the strong presumption of the Capital Assistance Program is that banks should remain in private hands, the regulators said.

The U.S. government has been taking steps to stabilize financial markets. Earlier this month, Treasury Secretary Timothy Geithner announced a broad plan which was fleshed out in a statement today. Major U.S. banking institutions will be evaluated to see if they need additional capital. If they do, they will be given the chance to raise private capital. The government will provide temporary capital otherwise.

Earlier on Monday, Citigroup chief executive Vikram Pandit sought to reassure colleagues about the bank amid concern over the weekend that the government would nationalize it.

In a letter to colleagues obtained by Reuters, he addressed the rumors and speculation in the market by pointing out comments by the White House and Treasury recently indicating their preference for a private banking system. He urged employees to instill confidence in clients and customers of the bank.

The government said today it will provide capital in the form of mandatory convertible preferred shares, which could be converted into common equity shares only as needed over time to keep banks well-capitalized, the regulators said in a statement. The regulators said major U.S. banks currently have capital in excess of amounts required to be considered well capitalized.

The Federal Reserve announced earlier this month it was committing to provide up to $1 trillion in loans to expand consumer lending. The Fed's TALF program (Term Asset Loan Facility) would help improve securitization markets linked to those areas.

While the move would not avert large losses by financial institutions Deutsche Bank analyst Mike Mayo wrote in a not to clients that it can help cushion downside scenarios related to lack of credit availability. Consumer loans at U.S. banks are 14 percent of their total, he said.