U.S. bank regulators may extend a guarantee program set up at the peak of the financial crisis, fearing that ending the program could spark liquidity failures at small banks.

Sheila Bair, chairman of the Federal Deposit Insurance Corp, said on Thursday that the agency is considering extending the Transaction Account Guarantee program, known as TAG.

The program, set to expire on June 30, provides federal backing for accounts that businesses typically use to meet payroll and pay vendors.

It was put in place in October 2008 when businesses were pulling their money out of smaller banks and parking the funds in larger institutions perceived to be safer.

A key question is are we far enough out of the woods now. Or if we lift it, are we going to see that pick up again and trigger liquidity failures, Bair said at a conference for the American Bankers Association.

She said the FDIC will likely decide in the next 30 days whether to extend the program. As of the end of 2009, the FDIC was guaranteeing $834 billion in transaction accounts.

The issue highlights the fragility of the banking industry's recovery. Larger institutions have bounced back more quickly, while smaller banks are still struggling with large portfolios of troubled loans, many tied to commercial real estate projects.

So far this year, 30 small banks have failed. Bair reiterated on Thursday that this year will be a peak year for bank failures in the current crisis, eclipsing the 140 institutions that collapsed in 2009.

I think banks are making progress in working through their troubled assets, Bair said. We think this is going to peak this year, and it's going to get considerably better next year.

She said she sympathized with community bankers who told her at the conference that they are at a competitive disadvantage. They said larger banks are still considered too big to fail and therefore enjoy lower funding costs and an influx of deposits.


Bair said the FDIC will soon be moving forward on multiple proposals, including controversial plans designed to spark responsible securitizations and rein in risky banker pay structures.

The FDIC aims to roll out an official proposal in the next couple months that would provide banks with safe harbor protection for securitizations if banks meet higher underwriting standards and retain an ownership interest in the loans.

Securitizations that meet those standards would be protected from seizure if a bank fails.

Industry groups are concerned the proposal threatens to undermine the securitization market through what they have characterized as strict preconditions.

Bair said the FDIC hopes to finalize the new rules by late summer.

She also said the agency is continuing to look at its preliminary proposal that would tie the riskiness of bank compensation schemes to how much banks pay for deposit insurance.

This is a very tricky area, and I understand that. And we want to be very careful here, Bair said.

The FDIC in January floated a plan that would require banks with risky payment schemes, such as huge cash components and incentives for short-term results, to pay more for deposit insurance.

Other regulators have questioned the proposal, saying there may not be enough evidence that pay practices are a big factor in bank failures.

Bair, however, said there is ample proof that irresponsible pay schemes can be a contributing factor to the collapse of institutions.

(Reporting by Karey Wutkowski; Editing by Steve Orlofsky and John Wallace)