WRAPUP 1-CIT in talks with regulators; stocks, bonds fall

* Talks on transfer of assets into CIT Bank

* Says transfers would enhance liquidity position

* Bonds, stocks fall sharply amid liquidity talks

NEW YORK, July 13 (Reuters) - CIT Group Inc CIT.N, which provides financing to small and mid-sized businesses, said it is discussing with regulators ways to bolster its finances if it fails to win access to the Federal Deposit Insurance Corp's Temporary Liquidity Guarantee Program.

The New York-based commercial lender said there is no assurance it will be granted access to the FDIC program, and it remains in talks about how to improve liquidity after losses resulted in a capital crunch.

CIT shares tumbled nearly 25 percent in morning trade, and its 5 percent notes due in 2014 fell to 48 cents on the dollar from 57 cents on Friday.

The delay in getting FDIC approval has driven CIT deeper into a liquidity crunch. Over the weekend, the Wall Street Journal said the company had hired top law firm Skadden, Arps, Slate, Meagher & Flom LLP to explore a possible bankruptcy filing [nBNG465972]. A CIT spokesman confirmed that the company had retained Skadden but declined to elaborate.

The Journal said the government has made clear that a bankruptcy by CIT would not be seen as a systemic risk to the financial system, as other lenders such as JPMorgan Chase & Co (JPM.N) and Deutsche Bank AG (DBKGn.DE) can take on many of the same loans in which CIT specializes.

Small businesses, particularly retail, could feel some pain from a CIT bankruptcy.

ASSET TRANSFERS

To boost liquidity, CIT said it is discussing a transfer of assets into its CIT Bank unit by obtaining a waiver of a Federal Reserve rule that limits such transactions. It said it may transfer vendor finance and trade finance businesses.

CIT has lost close to $3.3 billion since the end of 2007 and has said it has a $10 billion funding gap in the year to March 31, 2010. In December it became a banking company and obtained $2.33 billion from the government's Troubled Asset Relief Program.

The lender has been hard hit by the two-year-old credit crisis and has tried various capital-raising plans -- including growing its retail bank and selling assets and stock -- to pay off maturing debt and prevent further rating downgrades.

It has been trying to increase its bank deposits at CIT Bank to provide a more stable form of funding while capital markets remain restricted.

Last year, CIT shopped its $4.5 billion railcar leasing unit for several months, then shelved this plan after commercial lender GATX Corp (GMT.N), which had been seen as a potential buyer, offered more than $3 billion for a similar business owned by General Electric Co (GE.N).

RIPPLE EFFECTS