The federal government might help shore up non-bank financial institutions by working with other entities.

Treasury Secretary Henry Paulson discussed that possibility today during an update on the Bush administration’s financial rescue efforts.

“We are designing further strategies for building capital in financial institutions,” Paulson said.

One solution could be to make Troubled Asset Relief Program funds stretch further by “attracting private capital, potentially through matching investments,” Paulson said.

The matching program could meet the “capital needs of non-bank financial institutions not eligible for the current capital program,” Paulson said.

But “broadening access in this way would bring both benefits and challenges,” Paulson warned. “Non-bank financial institutions provide credit that is essential to U.S. businesses and consumers. However, many are not directly regulated and are active in a wide range of businesses, and taxpayer protections in a program of this sort would be more difficult to achieve.”

Before working with private entities to create a capital purchase program, the first capital purchase program must be completed, Paulson said.

“We have to assess its impact and use this information to evaluate the size and focus of an additional program in light of existing economic and market conditions,” Paulson said.

Paulson rejected the idea that the rescue program now has enough cash.

“Although the financial system has stabilized, both banks and non-banks may well need more capital given their troubled asset holdings, projections for continued high rates of foreclosures and stagnant U.S. and world economic conditions,” Paulson said.

Paulson said federal regulators must continue to stand ready to prevent systemic failures.

“That is the basis for Monday’s action to purchase preferred shares in [American International Group Inc., New York],” Paulson said. “The stability of our system remains the highest priority.”