FDIC Hopes to Kickstart Consumer Lending Through New Debt Guarantee

By DAMIAN PALETTA

WASHINGTON -- The Federal Deposit Insurance Corp.'s plan to expand its debt-guarantee program is part of an aggressive government push to persuade banks to make more consumer loans and kickstart the economy.

The FDIC said early Friday that it would expand its Temporary Liquidity Guarantee Program to now back debt with a maturity of up to 10 years, as long as the debt is supported by collateral and its issuance supports new consumer loans. This could boost funding for everything from student loans, credit cards and other products beyond just mortgages. Previously the FDIC was backing debt with a three-year maturity.

"We certainly envision significant interest," FDIC spokesman Andrew Gray said.

The FDIC's move broadens its guarantee to a larger array of financial products to restore confidence in the financial system. It's the latest step by the government to try and build a new market in the United States that would be an alternative to the securitization market that has dried up for many types of loans. The model would the "covered bond" that European banks use to fund their loans.

Covered bonds are a type of debt backed by a pool of collateral. With the FDIC guaranteeing the debt for these bonds, investors would face little risk to help finance more lending from banks.

As part of an emergency program announced late last year, the FDIC had been willing to back certain debt of up to three years. The program proved to be popular, though. As of Jan. 5, the FDIC was guaranteeing $220 billion in debt from federally insured banks and thrifts.

Their broader plan has been in development for several weeks and could be up and running later this month. The FDIC's board is slated to vote and approve an interim rule at a board meeting which would make the new program effective immediately. They also plan to solicit public feedback and could make changes later.

Mr. Gray said the FDIC would review applications for the program and banks would have to pay for the guarantee, similar to the arrangement for the existing program.

The FDIC has taken several dramatic steps in the last six months to expand its guarantee and even agreed to temporarily offer certain banks unlimited deposit insurance on noninterest bearing accounts.

Write to Damian Paletta at damian.paletta@wsj.com