Federal Deposit Insurance Corp. Chairman Sheila Bair lauded the progress of the agency's liquidity guarantee Thursday, warned the industry not to expect a long-term bailout, and urged banks to focus on keeping the faith of their customers.

"The future of banking will depend a great deal on how bankers embrace their role in maintaining the public's trust, and by how you respond to the current crisis," Ms. Bair said in remarks prepared for the Banker of the Year gala held by American Banker.

"This is an opportunity for bankers to demonstrate that the public's trust in them is well-placed."

Ms. Bair, in the event's keynote speech, said the FDIC's temporary program to cover all senior unsecured bank debt and no-interest deposits was gaining popularity.

About $37 billion of debt has been issued since the program was started in mid-October to strengthen liquidity in the market, according to banks' filings, she said. She added that the program — which will soon take in added premiums for the coverage — will probably be a revenue boost for the agency's diminishing insurance reserves.

"The premiums we're charging for the debt guarantee program are significantly higher than those charged for deposit insurance," she said. "We expect to make a profit on this program, and we'll put the proceeds into the Deposit Insurance Fund."

A revenue boost for the Deposit Insurance Fund could not have come at a better time. As failures mount, the agency reported last week that its reserves at the end of the third quarter were only 0.76% of insured deposits — 25 basis points below the second-quarter ratio and far below the 1.15% statutory minimum.

Starting next year, banks and thrifts will begin to feel the sting of a premium rise on insured deposits to improve the ratio. The FDIC has proposed raising assessments in the first quarter to between 12 and 14 basis points for most institutions.

Most of the new debt issuance has come from the largest institutions, including $9 billion from Bank of America Corp. and $5.5 billion from Citigroup Inc. All institutions have received the coverage free of charge. But after today, companies that do not opt out will be charged 75 basis points for the debt coverage and 10 basis points for no-interest deposits that exceed the standard insurance limit of $250,000 per account.

Ms. Bair said the program is not intended to be biased toward large institutions.

"We're working hard to ensure that the benefits of these programs will work just as well for small and midsize institutions as they do for the largest institutions," she said.

Yet Ms. Bair reemphasized that the expansion of the federal safety net through the liquidity program and other guarantees must be temporary. It is up to financial institutions to prove they can operate on their own after the crisis, she said.

"The sooner you prove you have things under control, and can keep them under control, the sooner we can move back to a system where your shareholders earn the rewards but bear the full consequences of the decisions that you are paid to make on their behalf," she said.

The crisis should teach both bankers and regulators the importance of getting back to fundamentals, she said.

This "means accepting the obligation to make credit available to qualified borrowers on reasonable terms," she said, and "reasserting the banking industry's central role as the engine of economic growth and prosperity."

Ms. Bair said the market for securitized mortgages would return, but added, "Fundamental reforms will be necessary ... to produce transparency."

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