The U.S. government is offering to pay for debt consolidation of the nation’s financial institutions in a deal that could allow the country to exit its long-term debt obligations.
The White House announced the deal Thursday with the help of the Federal Reserve and other financial institutions, including banks and hedge funds.
The Treasury Department, which has not yet released the terms of the plan, said the program would help financial firms reduce their debt by refinancing their loans and paying down other liabilities.
The proposal would also allow banks to reduce their risk of default by paying down their outstanding debt and using their own capital to pay down their existing debt.
Financial institutions would have to offer a $1,000 loan or about $100,000 to a bank for each of their current and planned debts.
Under the plan’s terms, a bank that has already completed the consolidation would not be required to do so again.
“The consolidation would allow financial institutions to focus on the needs of their businesses, while allowing them to grow their businesses and compete in a global marketplace,” Treasury Secretary Jacob Lew said in a statement.
“It would also help keep the country on the right track toward a more stable, prosperous future.”
In recent years, the Federal Deposit Insurance Corp. and the U.K. Office of Fair Trading have begun to consider consolidating the nation�s banking sector.
Earlier this year, President Obama signed legislation that allowed the government to issue up to $20 billion in taxpayer-backed guarantees on the sale of troubled financial institutions.
Lew has proposed that the Treasury sell a portion of the $20-billion in guarantees to financial firms to cover the cost of consolidation.
In a statement, the Treasury said it expects the government would use its leverage to obtain the $1.6 trillion in loans.
It also said the consolidation plan would ensure that the United States retains its position as a leader in financial stability and global leadership.