The banking system is off life support, or soon will be.

That doesn't mean the problems for the system have all gone away. There’s still plenty of bad debt on banks’ books, and some of the biggest banks are still into Uncle Sam for billions. It means the collapse that was imminent a year ago after Lehman Brothers failed has been averted.

That's why the Federal Deposit Insurance Corporation appears ready to end its program guaranteeing debt for financial institutions. They can now raise money in a private market that was frozen solid last September, so the need for the program is lessened—at least as it applies to healthy banks. And that's why Treasury Secretary Timothy Geithner says the administration is backing away from some of the other extraordinary steps the government took to keep the banks on life support in the past year. He said the government would be shutting down its program guaranteeing up to $3 trillion in money market mutual funds on September 18, as expected; that program didn’t wind up costing the government anything and in fact earned more than $1 billion in fees from the mutual-fund industry.

"The financial system is showing very important signs of repair," Geithner told a Congressional panel Thursday. That could point to good long-term things for the economy; as banks recover, they’ll be more willing to lend, spurring consumer and business activity. But that day may still be down the road.

Observers agreed and said the plan by the FDIC to back away slowly from its commitment to cover banks’ debt was a sign of that movement. But, they warned, the banking system is still far from out of the woods. And as the government carefully disentangles itself from the system, there are still plenty of dangers to plenty of banks.

The Wall Street Journal reports that the FDIC’s emergency program to guarantee banks’ debts, part of the Temporary Liquidity Guarantee Program, could be drawing to a close as soon as October 31, though administrator Sheila Bair may extend the program in some special cases. So far, the program could be considered a success. It hasn’t faced any guarantee payouts despite having $304.14 billion in FDIC-backed debt issued, and the agency has collected $9.3 billion in fees from banks that have participated.

More importantly, the FDIC program helped stabilize the system by getting debt flowing to institutions at a time when credit markets had seized up. But the possibility of a sunset for the program is a sign that regulators believe that time has passed.

“I think it means they’re comfortable that healthy banks have sufficient access to the capital markets,” Brett Barragate, a commercial finance lawyer at Jones Day in New York, said. “It’s a pretty positive statement to the world and to the financial community.”

But Barragate said the possible sunset of the FDIC program was also signal to all banks that they would have to stand on their own in the future. And some of them might not be capable of that.

“They believe the healthy banks are going to be able to survive,” Barragate said. “But they’re not going to prop up an institution that should not be propped up.”

Dan Alpert, managing partner for Westwood Capital, LLC, a New York investment bank, said the government can’t keep propping up the banking system forever.

“You have this sort of untenable long-term position, which is why the FDIC sorely wants to get out of it,” he said. “The FDIC is not looking at a situation where it believes all the banks are out of the woods. We know that the losses are going to percolate through the banks. They’re praying that (the banks are) going to earn enough money to fill in the gaps.”

Ethan Heisler, managing director and credit analyst covering the banking sector at New York-based Hexagon Securities, a credit-focused investment bank and institutional securities firm (see correction at end of story),

said the FDIC should go slow as it pulls away from guaranteeing debt. And he thinks the agency will indeed go slow. There may be several of those special cases after October 31, he said.