US officials are examining ways gradually to convert government stakes in banks into ordinary shares as banks accumulate losses, according to people close to the discussions.

The point would be to provide a drip-feed of additional common equity as needed to cover losses – without the government owning a larger stake in the banks than is necessary.

Timothy Geithner, Treasury secretary, will announce the financial sector rescue plan on Monday along with a set of policies designed to reduce foreclosures and boost the housing market. The Treasury declined to comment on its deliberations.

One idea that has been considered by policymakers is for the government to change its existing holdings in the banks, which have taken the form of preferred shares – non-voting stock that carries a fixed dividend – into convertible preferred shares that could be converted into common stock.

Under this proposal, the shares would automatically convert into common equity if there were a decline in a bank’s health – as measured by its so-called tangible equity ratio, for example. The government may also make future capital injections in the form of such convertible preferred shares.

Some policymakers think this would give the government more “bang for the buck” than buying more preferred shares.

Bank stocks, meanwhile, rallied on Thursday as bankers expressed fresh confidence that the US authorities will find ways to circumvent mark-to-market rules as part of the new financial rescue package.

Executives who have talked to government officials recently said one option for the government would be to buy toxic assets below the value at which banks value them on their balance sheets, but provide a government security equal to the difference between government’s purchase price and the marked value.

That would enable banks not to crystallise their losses on the assets for a number of years and wait and see whether they recover in value.

Executives and policymakers who have spoken to key officials believe the plan to be presented by Mr Geithner will have insurance-style guarantees on bank portfolios of assets at its core, but will include a so-called “bad bank” that will acquire securities that have already been heavily written down.

However, sources cautioned that the final shape of the rescue plan would be decided by Lawrence Summers, the National Economic Council director, and Mr Geithner.

Elizabeth Warren, an independent monitor appointed by Congress to scrutinise the bank recapitalisation programme, said on Thursday that the Bush administration overpaid by $78bn when it injected more than $250bn into bank preferred shares starting last year – a subsidy element of about 30 cents in the dollar.

This is slightly higher than the 25 cents in the dollar subsidy estimated by the Congressional Budget Office.

Meanwhile, the Obama administration moved to quell talk of a rift between Paul Volcker, the former Federal Reserve chairman, and Mr Summers, following a report by Bloomberg that claimed Mr Volcker was unhappy about slow progress in setting up an independent panel of economic experts he is set to chair.

Additional reporting by Andrew Ward in Washington