WASHINGTON - The Bush administration plans to greatly expand protections for the U.S. banking system out of deep concern for the faltering economy, an industry official said Monday night after banking executives and top federal officials met to revamp the largest bailout plan in the nation's history. President Bush was to announce the expansion Tuesday morning.
Earlier Monday, stocks soared around the world in response to dramatic government economic rescue efforts in the U.S. and overseas — and the possibility of the even bolder American action.
The administration will use perhaps as much as $250 billion of the $700 billion bailout program recently passed by Congress to purchase stock in U.S. banks, providing the banks with desperately needed money, the official said. In addition, the Federal Deposit Insurance Corp. will temporarily provide insurance for loans between banks, charging the banks a premium for doing so. That should unlock a vital credit flow that has come under severe stress, putting the health of the entire economy in peril.
The official, who spoke with knowledge of the Treasury Department meeting with the bankers on Monday, commented only on condition of anonymity because the details of the plan had yet to be released.
This FDIC program would take the form of providing insurance for new senior preferred debt that one bank would lend to another bank. This debt would be insured by the FDIC for three years, helping to unlock bank-to-bank lending, which has fallen dramatically because of fears about repayment in the face of billions of dollars of bank losses because of bad loans, primarily in mortgages.
The official said the FDIC was also considering removing for a period the current $250,000 limit on FDIC insurance on bank deposits. However, it was unclear whether all deposits above this amount would be covered or only certain types. In response to the crisis, Congress as part of the bailout bill temporarily boosted the deposit insurance cap from $100,000 to $250,000.
The administration's proposals were explained during a meeting at the Treasury Department that had been called by Treasury Secretary Henry Paulson and included the top executives of the largest banks in the country. Federal Reserve Chairman Ben Bernanke also participated in the discussions.