This past weekend, the Federal Reserve Bank decided to suspend a rule intended to prevent the poor decisions of investment banks from affecting your savings account (and ultimately all taxpayers). The worrisome move will allow depository institutions (retail banks like those at which people have savings and checking accounts) to lend money to investment banks (banks like the now defunct Lehman Brothers that are in the business of providing capital to other investors) owned by the same company. The upshot is that the federally insured funds in your savings and checking accounts may now be used to bail out investment banks now scrambling to avoid bankruptcy. Or, as investment commentator Nate Weisshaar puts it: "...the money in my Bank of America savings account can now be used to shore up liquidity for some dodgy real estate portfolio that helped pull Merrill under." Funds in depository institutions are insured by the Federal Deposit Insurance Corporation (FDIC), which means that the money you have in your checking account cannot be lost should your bank go bankrupt. Should your bank fail, a FDIC-managed fund is used to ensure that you lose no money. This fund is financed by FDIC-member banks, so when a bank fails there is no loss of federal funds. However, when multiple banks fail at the same time, the fund may not have enough money to cover all of its guarantees, forcing Congress has to step in and appropriate funds to make up the difference. This is what happened in the late 1990s with the savings and loan crisis, which ultimately cost taxpayers about $163 billion (in 2008 dollars). The Fed's move over the weekend has increased the probability that Congress will have to step in to shore up the finances of the FDIC. And thanks to a slew of bank failures this year, the FDIC fund is now running a dangerously low levels. Additional failures of large banks or savings and loans companies seem likely, and that could overwhelm the FDIC's insurance fund, said Brian Bethune, U.S. economist at consulting firm Global Insight. "We've got a ... retail bank run forming in this country," said Christopher Whalen, senior vice president and managing director of Institutional Risk Analytics. [...] But fear is growing on Main Street as well as Wall Street about the likelihood of multiple bank failures and the strain that would put on the FDIC. The fund...is at $45.2 billion — the lowest level since 2003. At the same time, the number of troubled banks is at a five-year high. FDIC Chairman Sheila Bair has not ruled out the possibility of going to the Treasury for a short-term loan at some point. But she has said she does not expect the FDIC to take the more drastic action of using a separate $30 billion credit line with Treasury — something that has never been done. The FDIC's fund is currently below the minimum set by Congress in a 2006 law. The failure of IndyMac Bank in July cost $8.9 billion. Just as the FDIC is becoming strapped for cash and as the nation's largest thrift (Washington Mutual) teeters on the brink of insolvency, the Fed has made it easier for the financial system cancer to spread to the federal budget deficit. Image by Flickr user Andrew Stawarz used under a Creative Commons license.