If you thought that bank failures and bailouts had passed, the FDIC has an unpleasant wake-up call for you.  The depositor insurance corporation has now required banks to pay their fees in advance for the first time ever, and for good reason.  The FDIC estimates that bank failures will cost $100 billion and that they will have to run unprecedented deficits for the next four years:

Federal regulators expect bank failures to cost the deposit insurance fund about $100 billion in the next four years and the fund to be running at a deficit Wednesday.

That is higher than an earlier estimate of $70 billion in failure costs through 2013.

The Federal Deposit Insurance Corp. made the projections Tuesday as its board voted to propose requiring banks to prepay an estimated $45 billion in regular insurance premiums for 2010-2012. The proposal could take effect after a 30-day public comment period. …

Without additional special fees or increases in regular premiums, the insurance fund — at $10.4 billion at the end of June — will become “significantly negative” next year and could remain in deficit until 2013, the FDIC is now projecting.

We’ve been keeping an eye on the FDIC for a while, as it is an indicator of predicted strength in the banking sector.  This shows that the financial crisis has far from passed.  The government has prepared for failures on a scale that has not been seen in decades.  Even with this preparation, it appears that they will not be able to keep pace and will need steady infusions from the general fund to keep depositors secure enough to stop bank runs.

The “prepaid assessments” allow the FDIC to keep from choosing between two unpleasant options.  It has access to a $500 billion line of credit with the Treasury, but a personal conflict between Treasury Secretary Tim Geithner and FDIC chair Sheila Bair will keep her from tapping into it except in extremis.  The advance payments from member banks replaces a foolish idea floated last week that would have had the insurer-regulator borrowing money from the very banks it regulates, an absurd conflict of interest.

However, this is somewhat akin to getting advances on a salary.  Taking the money now means that the FDIC won’t collect these fees in later years.  It’s a big gamble that the crisis will not last long enough to keep the FDIC in crisis mode for long.  If banks continue to fail after next year, the FDIC and the federal government will be forced to float more and more depositors out of the general fund, which will increase our deficit spending and make our bonds less and less attractive.

It’s a grim assessment, and the best we can hope is that this is the worst-case scenario the FDIC faces.