In order to replenish the declining fund of the Federal Deposit Insurance Corporation (FDIC) that insures regular deposit accounts when banks fail, the agency may ask U.S. banks to prepay fees for three years.

Under the plan, banks would have to prepay their insurance premiums of $12 billion a year for 2010-2012, for a total of about $36 billion. The fees could, however, vary somewhat according to growth in total insured deposits. The FDIC board will discuss the issue today at its public meeting.

The prepayment proposal is likely to get opposition from banks as the size of the upfront fees is significant and the banks are just at the start of their recovery period.

The agency could again propose an emergency assessment, or a transfer of cash collected in fees from the FDIC's temporary rescue program that guarantees huge debt that banks issue to each other. The agency has already collected about $9 billion in fees from banks issuing debt under the program.

Also, the regulators are considering asking healthy banks to bail out the government soon, as it is necessary to replenish the deposit insurance fund which has slipped to 0.22% of insured deposits, below the mandated minimum of 1.15%.

The tally of failed federally insured banks has reached 95 so far this year, causing a rapid decline in the FDIC's deposit insurance fund as it has been appointed receiver for these banks. Despite imposing a special assessment charge on banks a few months ago, the FDIC's cash balance now stands at a third of its size at the start of the year. As a result, the current moves would be great relief for the FDIC.

The FDIC insures deposits at 8,195 institutions with roughly $13.5 trillion in assets. When a bank fails, it reimburses customers for deposits of up to $250,000 per account. The outbreak of failing financial institutions has significantly stretched the regulator's deposit insurance fund. At June 30, 2009, the fund corpus fell to $10.4 billion, the lowest since 1993, from $13.0 billion in the prior quarter.

Though in May 2009 Congress more than tripled the amount the FDIC could borrow from the Treasury if needed to restore the insurance fund -- to $100 billion from $30 billion -- the FDIC is unwilling to use its authority to borrow from the Treasury. Any new borrowing from the Treasury would be considered a loan from the taxpayer that could push the industry to a political reaction, resulting in a wave of restrictions.

As part of its $700 billion bailout program, the government provided capital to institutions in exchange for preferred stock and warrants to purchase common shares. Many of the financial institutions that have already repaid bailout money include JPMorgan Chase (JPM), American Express (AXP), Goldman Sachs (GS), Morgan Stanley (MS), Capital One (COF), BB&T Corporation (BBT) and U.S. Bancorp (USB). Also, banks like Bank of America (BAC), Wells Fargo (WFC) and Citigroup (C) are expected to exit from TARP over the next 12 to 18 months.

Though lending money to FDIC might be accretive to the banks earnings, paying advance fees could be a burden to them as the financial crisis is far from over. Also, the higher fees are likely to be a drag on the profitability of banks.