UDPATE 2-FDIC program covers $1.9 trillion in debt, deposits

(Adds Bair quotes, details, edits throughout)

By Karey Wutkowski

WASHINGTON, Oct 14 (Reuters) - The U.S. government's broadly expanded guarantee program 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" to 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 $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.

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 deposits out of smaller banks and putting them in larger banks that were perceived as safer. The flight of funds caused liquidity crunches at smaller, "otherwise quite healthy and viable" institutions, she said.

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

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

The new FDIC guarantee for deposits, effective immediately, applies to non-interest-bearing transaction deposit accounts and expires at the end of 2009.

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

All FDIC-insured institutions will be covered for 30 days, after which they can opt out of the program. Banks that stay in will pay higher premiums into the FDIC insurance fund for the added protection.

The agency will lift the measures after they expire because they are a temporary solution to a temporary problem, Bair said. "For insured depositary institutions, we're dealing with a confidence issue, not a capital solvency issue."

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