) -- When the FDIC's debt-guarantee program begins to phase out next month it will strengthen the position of banks that have paid off bailout funds from the Treasury Department, even if they have to pay more to issue new bonds.

Critics contend firms that have repaid more than $70 billion in funds from the Troubled Asset Relief Program are not truly independent because the Federal Deposit Insurance Corp. still guarantees their debt. The FDIC confirmed earlier this week that the program will at least begin to phase out on Oct. 31 as intended.

"The (FDIC's Temporary Liquidity Guarantee Program) has been very effective at helping financial institutions bridge the uncertainty and dysfunction that plagued the credit markets last fall, " FDIC Chairwoman Sheila Bair said in a statement. "As domestic credit and liquidity markets appear to be normalizing and the number of entities utilizing the Debt Guarantee Program (DGP) has decreased, now is an important time to make clear our intent to end the program."

The program seems to have been a win-win for the regulator, as well as the banking industry. The FDIC has so far collected more than $9 billion in fees for the privilege. It still has $320.1 billion worth of guaranteed debt outstanding to 94 issuers, the last of which will expire by December 2012.

Troubled firms conserving capital have been able to pay lower coupons on debt issuance while paying those fees, which on an individual basis were far less costly than what debtors would have charged. None have yet defaulted or otherwise required the FDIC to make good on its guarantees.

Firms like

Goldman Sachs

(GS) - Get Report


JPMorgan Chase

(JPM) - Get Report


Morgan Stanley

(MS) - Get Report

, which have paid back TARP, as well as those that haven't, like

Bank of America

(BAC) - Get Report



(C) - Get Report


Wells Fargo

(WFC) - Get Report

, have all benefited from the program.

The FDIC is seeking comment on whether to extend an emergency facility for another six months after the current program expires for banks in desperate need. But while using the DGP today makes sense why would a bank stand alone in paying lenders more if it doesn't have to? Using it under those circumstances might lead lenders and competitors to smell blood in the water.

General Electric

(GE) - Get Report

provides an example of this. GE converted into a bank holding company due to its GE Capital lending division. Creditors began to get uneasy about the firms loss of top-notch credit ratings and its halted dividend, making a program like DGP initially useful.

However, when some began to suspect that the firm couldn't wean itself off the governments teat, doing so became a signal of strength. GE announced in July that it would stop using DGP of its own accord.

The FDIC extending an emergency facility for six months would provide reassurance that the feds aren't bailing on bailed out banks if not for the case of

CIT Group

(CIT) - Get Report

. CIT, a commercial lender that has received TARP funds, asked the FDIC to utilize the program during the summer as it faced a massive debt crunch and teetered on bankruptcy.

The FDIC said no.

Luckily for CIT, it was able to renegotiate debt terms with its lenders and narrowly avoid bankruptcy. Presumably, if CIT had been a larger lender more linked to the broader financial system, the regulator would have had to acquiesce. But if the emergency facility doesn't help small banks in dire need, it may be a misnomer.

-- Written by Lauren Tara LaCapra in New York