Community banks in need of liquidity will soon have a cheaper way to sell debt guaranteed by the Federal Deposit Insurance Corp.

Transaction costs such as underwriting fees have discouraged many smaller institutions from issuing bonds through the Temporary Liquidity Guarantee Program, which the FDIC started in November.

In addition, a bond offering from a single community bank would probably be too small for many institutional investors to bother with.

Several securities firms have started laying the groundwork for these small banks to pool their debt together into offerings large enough to entice buyers. The pooling structure allows the fees to be split among the banks, reducing the cost for each.

Liquidity at smaller banks has become an industry hot spot and a focus for regulators as credit problems have eroded capital. Raising brokered deposits is no longer an option for some institutions, and other sources of liquidity have become more onerous. Moreover, examiners are paying closer attention to the liability side of the balance sheet and stress testing for potential further complications.

"Liquidity … is more important than ever in the current environment," Jennifer Kelly, the senior deputy comptroller for midsize and community banks in the Office of the Comptroller of Currency, said in an interview last month. "It is something banks should be paying attention to and be realistic about what is happening and what might happen in the future and make sure they are prepared for it."

Observers said issuing FDIC-backed debt under the pooled structure could help liquidity-strapped banks improve their standing with regulators.

"We are aware of the pooling and have been looking at that," said Diane Casey-Landry, the chief operating officer of the American Bankers Association. "We think it is a positive move for smaller institutions and makes for a much more cost-effective way of issuing the debt."

Regions Financial Corp.'s Morgan Keegan & Co. filed a registration statement for a pooled bank offering with the Securities and Exchange Commission last week. Industry sources said Sandler O'Neill & Partners LP and Royal Bank of Canada's RBC Capital Markets are also planning on bringing such pools to market. (Many of these same firms have used a similar arrangement to pool trust-preferred debt issues from banks.)

"Banking is a three-legged stool," said Brian Mellone, the managing director of fixed-income banking at Morgan Keegan. "You have capital, liquidity, and assets. You need liquidity and this helps strengthen that leg of the stool."

On Jan. 26 the FDIC said it had guaranteed $228.6 billion of outstanding debt under the temporary program. It did not identify the issuers, but some companies have disclosed their participation. Most have been larger companies like American Express Co. and Bank of America Corp.

To be sure, a few regional banks are issuing stand-alone FDIC-backed notes. For example, the $2.4 billion-asset Bank of the Cascades in Bend, Ore., a unit of Cascade Bancorp, is set to close on a $41 million issuance on Feb. 12, in a deal underwritten by Cohen and Co.

Mr. Mellone said the likely investors in the pooled debt would be those that are interested in government-backed investments but want higher yields. Bonds issued so far have paid a coupon of around 2% to 3% for a maturity of two to three years.

Including the FDIC's 1% guarantee fee, the pooled debt is expected to cost banks somewhere between 3.5% and 4%, and so would be more expensive than borrowing from the Federal Home Loan banks, said Joe Ford, co-chairman of the financial services group and a partner in the Austin office of DLA Piper.

Still, issuing such debt would let banks "keep Federal Home Loan bank powder dry so they could have this and that," he said.

J.M. Hofmann, the president of Main Street Bank in Kingwood, Tex., said it does not plan to participate in the FDIC program, but he agreed that pooling would make it more affordable for community and regional banks by reducing legal and brokerage fees.

And when it comes to ensuring liquidity, price is not an issue when options start evaporating.

"If you don't have liquidity, then you have serious balance sheet problems," Mr. Hofmann said. "Whether you are paying 3% or 5% for that liquidity is almost irrelevant."

Chet Fenimore, the managing partner in the Austin office of Hunton & Williams, said community and regional banks will have to decide on a case-by-case basis whether participating in pooled debt is worth the cost.

"This may be a good way for them to have a secondary liquidity source for the next three years," Mr. Fenimore said. The program would be a "more stable source than brokered deposits or Internet deposits," he said, "because you know you have this liquidity for the next three years."

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