UPDATE 2-Expanding FDIC borrowing could lower bank fees

* Bank assessments could be lowered

* More bank failures expected

* Regulators dealing with rising credit losses

* After stress tests, banks able to access markets

(Adds more Dugan comments, byline)

By John Poirier

WASHINGTON, May 12 (Reuters) - U.S. Comptroller of the Currency John Dugan said on Tuesday an expansion of the Federal Deposit Insurance Corp’s borrowing ability will help lower assessments charged to banks for deposit insurance.

Dugan said he is happy with efforts in Congress to expand the FDIC’s borrowing ability with the Treasury Department to $100 billion from $30 billion.

The increased borrowing authority could allow the FDIC to forgo a special assessment on banks to replenish the U.S. deposit insurance fund.

In February the FDIC proposed raising premiums and assessing a one-time fee of about 0.2 percentage points to raise about $15 billion to help replenish the U.S. deposit insurance fund, which has been steadily dwindling as banks fail.

As banks try to shore up their capital, they have complained that they can’t afford to pay the assessment, which is scheduled for the third quarter.

“Bank failures are likely to continue and the cost to the fund will likely increase,” Dugan said at the conference of community bankers.

He declined to tell reporters after his speech what the appropriate bank assessment level should be, if Congress finalizes legislation.

Dugan, whose agency regulates some of the biggest national banks owned by Bank of America Corp BAC.N and JPMorgan Chase & Co JPM.N as well as many community banks, said his agency is focused on dealing with a rise in credit losses across all assets exacerbated by the recession.

“We are dealing now with the kind of rising credit losses that come with a recession and we are seeing that all over the country and we are seeing with banks of all sizes,” he said.

“It is the number one focus of the OCC and all supervisors right now.”

Dugan said supervisors are encouraging banks across the country to build adequate loan loss reserves and capital.

Bank of America and JPMorgan were among 19 banks that underwent a government “stress test” to determine their health under extreme economic conditions.

In rare regulatory step, government officials released the results of the tests. The Federal Reserve and other regulators announced last week that 10 of the 19 firms would need to raise an additional $74.6 billion to be adequately buffered against the worst-case scenario.

“That transparency helped removed the uncertainty,” Dugan said. “It seems to have given comfort to investors because it has caused... an immediate round of capital-raising by large banks across the system.”

Dugan said he regulators should not let the stress test set a precedent for issuing confidential bank examination information to the public.

“This really was an extraordinary circumstance requiring this extraordinary measure.