FDIC program covers $1.9 trillion in debt, deposits

By Karey Wutkowski

WASHINGTON (Reuters) - The U.S. government's guarantee program unveiled on Tuesday is expected to cover about $1.9 trillion in U.S. banks' new debt and additional deposits, a top banking regulator said on Tuesday.

Federal Deposit Insurance Corp Chairman Sheila Bair called the temporary liquidity guarantee program a "profound and unprecedented action" that will significantly boost confidence in credit markets.

"This action is one of the biggest things the FDIC has ever done, and I think it's just a sign of the times," Bair said during a conference call with reporters.

The guarantees cover a pool of about $1.4 trillion in senior unsecured debt and about an extra $400 billion to $500 billion in transaction deposit accounts, which businesses typically use to meet payroll and pay vendors.

The FDIC guarantees are part of a package of actions the U.S. Treasury Department unveiled on Tuesday in which it will also inject $250 billion of capital into U.S. banks.

Bair said the added protection is critically important for businesses' transaction accounts, which often hold balances above the prior insurance limit of $250,000.

She said these accounts had become "absolutely a problem" because companies were pulling their deposits out of smaller banks and putting them into larger banks that were perceived as safer. The flight of funds have been causing liquidity crunches at the smaller, "otherwise quite healthy and viable" institutions, she said.

Bair said the extra guarantee for transaction accounts "definitely would have made a difference" for Wachovia. She said the North Carolina bank experienced a serious liquidity issue after business transaction accounts fled the firm.

In an unprecedented move, the FDIC stepped in to help arrange a deal last month for Citigroup to buy parts of Wachovia. Wells Fargo later made a sweetened offer to take over Wachovia, which it accepted.

The guarantee for deposits, effective immediately, applies to non-interest-bearing transaction deposit accounts and is set to expire at the end of 2009.

The FDIC's guarantee for debt applies to senior unsecured debt issued between October 14, 2008, and June 30, 2009. The guarantee on that debt will last for three years.

Bair said the agency will be able to lift the measures after they expire because they are a temporary solution to a temporary problem.

"For insured depositary institutions, we're dealing a confidence issue, not a capital solvency issue," she said.

(Reporting by Karey Wutkowski)