UPDATE 1-Obama proposes tripling US FDIC's borrowing power

Mon May 11, 2009 3:40pm BST

* Would help FDIC protect bank deposits

* Would help FDIC lower premiums charged to banks

* Bailout's estimated impact on deficit rises

* Congress also considering expanding FDIC credit lines

(Adds comment, background)

By John Poirier

WASHINGTON, May 11 (Reuters) - U.S. President Barack Obama on Monday proposed increasing the borrowing authority of the Federal Deposit Insurance Corp with the Treasury Department to $100 billion, more than triple the current $30 billion.

With an expected increase in bank failures, the authority would give the FDIC the ability to finance expenses for resolving failed FDIC-insured institutions, including guaranteeing up to $250,000 per depositor beyond this year.

The increase also would give the agency the flexibility to lower premiums charged to banks for FDIC insurance coverage at a time when struggling banks can least afford to pay it.

In the meantime the U.S. Congress is considering legislation aimed at giving the FDIC a similar increase but lawmakers also want to give the agency temporary borrowing ability for up to $500 billion in the event of an emergency.

Congress is also considering temporarily extending the $250,000 guarantee beyond 2009.

"It would allow the FDIC to grant a deposit insurance premium reprieve in the near term when bank capital is already strained," Obama's 2010 budget proposal said.

"This temporary reprieve would be followed by steady increases in insurance premium assessments as the economy and bank health recover."

The move comes as the government upped its estimate of what the bank bailout would do to the ballooning budget deficit.

As a result of technical revisions, the government's bank bailout, known as the Troubled Asset Relief Program (TARP), is now expected to increase the federal deficit by $608 billion in the current fiscal year, more than double an earlier estimate, according to a White House document released on Monday.

"We also have more information about the severity of the financial crisis facing the nation, and this is reflected in new, higher estimates for the cost of financial stabilization efforts undertaken through TARP and by the FDIC," White House budget director Peter Orszag wrote in his blog, released to reporters.

The White House had earlier estimated the TARP would add about $242 billion to this year's deficit. The total deficit is now seen hitting $1.84 trillion, or 12.9 percent of the economy, in the current 2009 fiscal year that ends September 30.

In February the FDIC proposed raising premiums and assessing a one-time fee of about 20 basis points to raise about $15 billion to help replenish the U.S. deposit insurance fund, which has been steadily dwindling as banks continue to fail.

On Friday the FDIC announced the 33rd failed bank this year. In 2008, 25 U.S. banks were seized by officials, up from only 3 in 2007.

FDIC Chairman Sheila Bair recently said that the FDIC board members might meet in late May to cut the emergency assessment on banks to the "single digits" from 20 basis points as long as Congress is able to pass legislation to increase the FDIC's credit line with Treasury.

The proposed emergency fee, heavily opposed by the banking industry, is scheduled to be collected in the third quarter.

(Reporting by John Poirier, Kim Dixon and Corbett B. Daly; Editing by Walker Simon)