WASHINGTON — The Federal Deposit Insurance Corp. is stepping up its efforts to help combat the financial crisis, offering to guarantee certain bank debt for 10 years and advocating returning the Troubled Asset Relief Program to its original purpose, Chairman Sheila Bair said Friday.
The agency plans to issue a proposal soon that would allow a bank to apply to the FDIC for a debt guarantee lasting 10 years — versus the current three years — provided the collateral it puts up consists of recently originated consumer loans.
In an interview, Ms. Bair said the program would help promote the availability of credit, strengthen interbank lending, and reduce risk to the FDIC.
"Because there would be a direct condition between this and new lending — which is the point of all these programs, to try and jump-start lending, to get more capital market funding into the bank — these are all good public policy things to do," she said.
Under the plan, banks would have to apply before July of this year to be eligible to issue 10-year secured debt backed by the FDIC. It would be less risky for the FDIC because the debt would be collateralized, Ms. Bair said.
Banks also would have to stay within current caps of the existing program, which stipulate that a bank may issue debt equal to no more than 125% of its outstanding secured debt before the temporary liquidity program began in October.
During the interview, Ms. Bair strongly supported the Federal Reserve Board's recommendation to create a "bad bank" that would buy troubled assets — the initial goal of Tarp — and said a second government backstop for Bank of America Corp. was unfortunate but necessary.
"I didn't really want to do it," she said. "I don't think anybody wanted to do it."
But she said regulators must act when "there could be a liquidity event that would be destabilizing to the market."
Ultimately, the backstop, under which the FDIC could have to absorb as much as $2.5 billion in losses at B of A as a result of its acquisition of Merrill Lynch & Co. Inc., shows the need for a broader solution, Ms. Bair said.
"I don't think any regulator likes these one-off transactions," she said. "We have advocated and will continue to advocate a programmatic approach. We need a troubled-asset relief program."
The Treasury Department originally pitched Tarp as a program to buy troubled assets and ignite a market for them. In October, however, the Treasury publicly abandoned that approach, preferring instead to focus on injecting capital into banks.
But Fed Chairman Ben Bernanke and Ms. Bair have begun openly advocating a return to Tarp's original intent. Last week Mr. Bernanke suggested the creation of an aggregated bank that could price and purchase troubled assets, taking them off banks' books.
Ms. Bair said such an approach makes sense. "We are not going to be getting private capital coming into institutions in a significant way unless there is a way to deal with the risk on some of these assets," she said. "If the approach is to set up some kind of aggregator bank, or bad bank … to actually take bad assets off bank balance sheets, then we will be doing a better job at giving room on the balance sheets to undertake lending."
She said the Treasury could use funds from Tarp to capitalize the bad bank, and require institutions that want to sell assets to it to take an equity position in it to provide further loss absorption. She acknowledged that the government would have to find a way to price illiquid assets — the stumbling block that has dogged the idea from its inception — "but we think that's possible."
Such a scenario would maximize the money remaining in the Tarp fund, which has been steadily depleted by various programs. "If you use Tarp for capital, and also require participating banks to take an equity position, you could leverage a significant amount of troubled asset purchases."
Asked whether the government had enough remaining in Tarp, she responded: "I hope we do. You need to leverage the money."
But the government has already been taking a different tack with Citigroup Inc. and B of A. Under both government backstops, the government agreed to guarantee troubled assets without taking them off banks' books.
Ms. Bair said that approach also makes sense, but has some drawbacks. "The advantage is you don't have to deal with the same pricing issues," she said. "The downside is those assets remain on the balance sheet.