U.S. officials shouldn't micromanage banks, a top Treasury official told lawmakers Wednesday, even as the U.S. government takes equity stakes in more and more institutions.

Neel Kashkari, the Treasury's assistant secretary for financial stabilization, told a U.S. House subcommittee that the government shouldn't interfere with banks as they make their business decisions.

"However well-intended, government officials are not positioned to make better commercial decisions than lenders in our communities," Kashkari said in testimony Wednesday. "The government must not attempt to force banks to make loans whose risks they are not comfortable with or attempt to direct lending from Washington."

Members of the House Oversight and Government Reform Committee's domestic policy panel expressed little sympathy for Kashkari's concerns. Instead, they faulted Kashkari and the Treasury for not keeping track of how banks have used taxpayer dollars, questioning recent overseas investments, spending on executive bonuses and a lack of commitment for using rescue funds to benefit the U.S. economy.

"If the banking system is in serious enough trouble to require massive amounts of federal support, shouldn't that federal support be channeled to the domestic economy?" Rep. Dennis Kucinich, D-Ohio, asked Kashkari.

Kucinich, chairman of the Domestic Policy Subcommittee, cited as questionable Citigroup Inc.'s (C) $8 billion financing arrangement for public authorities in Dubai, as well as Bank of America Corp.'s (BAC) $7 billion investment in the China Construction Bank Corp. (601939.SH).

"The kinds of transactions they are doing include billions in loans and investments in other countries at precisely the time that a liquidity shortage has impaired credit markets in the U.S.," Kucinich said.

Other panel members questioned whether the Treasury had enough information to answer questions about how banks have used funds from the $700 billion Troubled Asset Relief Program.

"It's quite clear to me Treasury does not have the information or personnel in place to conduct vigorous oversight of the TARP," Rep. Edolphus Towns, D-N.Y., said. "I don't think they even know how much they don't know."

The comments from the committee members struck a familiar chord of criticism about the federal government's efforts to stabilize the U.S. financial system and rescue certain financial institutions deemed too big, or too important, to be allowed to fail.

Kashkari, acknowledging some of the concerns, said the Treasury isn't happy about having to repeatedly come to the rescue of individual firms such as Bank of America and Citigroup to the tune of billions of dollars of additional taxpayer funds.

"We regretted having to take these actions, to put so many taxpayer dollars at risk to support firms that had made bad decisions," he said. "But the choice was clear when the consequences of inaction were so severe."

Despite his warnings against micromanaging banks, Kashkari did suggest that the Treasury is open to using its positions as a significant investor in major financial institutions to affect change when the government deems it necessary. He cited the management changes required at American International Group Inc. (AIG) in the wake of its rescue by the government in September as an example of this position.

In addition, Kashkari put the onus on firms that have received extraordinary assistance from the government - the automakers, Citigroup, Bank of America, and AIG - to meet a higher standard of disclosure than banks that have just received capital injections from the Treasury.

"I believe institutions that receive extraordinary assistance have a moral obligation to disclose as much as possible," Kashkari said in response to questions about AIG and the various counterparties that have benefited as a result of the help provided the company by the government.

-By Michael R. Crittenden, Dow Jones Newswires; 202-862-9273; michael.crittenden@dowjones.com