The FDIC’s insurance fund, which protects consumers’ deposits, is heading for broke and according to the federal agency, it will stay that way until 2012. The FDIC is asking insured institutions to prepay three yearsworth of quarterly fees in order to refill its coffers and cope with many more bank collapses to come. The proposal is expected to yield $45 billion, and the FDIC says without this extra cash its funds will be completely wiped out by next year. The regulator’s board also voted to adopt a uniform three-basis point increase in assessment rates effective on January 1, 2011, and extend the restoration period from seven to eight years. More than 120 bank failures since the economic crisis began have diminished the FDIC’s deposit insurance fund (DIF) to its lowest level since the savings & loan crisis of the last decade, making it increasingly taxing for the agency to mitigate institutional losses. And the regulator sees a bumpy road ahead still — FDIC officials say the cost of bank failures between 2009 and 2013 will be about $100 billion, compared with an estimate of $70 billion made in May, with most of the failures expected this year and next. FDIC Chairman Shelia Bair assured depositors that their money would always be “100 percent safe” since the agency has a credit line with the U.S. Treasury of up to $500 billion, though she says she would rather not tap in to it. “It’s clear that Chairman Bair needs to take action,” said James Frischling, president and co-founder of NewOak Capital, an investment advisory, asset management, and capital markets firm in Manhattan. “The FDIC needs to replenish its fund and has few real choices,” Frischling said. According to Bair, the banking industry has substantial liquidity to prepay assessments.

As of June 30, FDIC-insured institutions held more than $1.3 trillion in liquid balances, 22 percent more than they did a year ago. “The decision [reached by the FDIC board Tuesday] is really about how and when the industry fulfills its obligation to the insurance fund,” Bair said in an FDIC statement. “In choosing this path, it should be clear to the public that the industry will not simply tap the shoulder of the increasingly weary taxpayer.” The FDIC said its proposed arrangement is less likely to impair banks’ lending than a one-time special assessment — which would have cost the industry $5.6 billion in a single blow, after already paying an identical special assessment to the agency earlier this year. But according to a report in the New York Times, the plan “would almost certainly wipe out the industry’s earnings for this year.” “It’s important that the industry itself takes the first step in fixing the situation,” agreed Frischling. “Chains are as strong as their weakest link and the banking sector is in jeopardy with the FDIC being forced to step in as a result of the actions by industry participants.”