In a bow to struggling banks, the FDIC has agreed to slash its insurance reserves on banks, and that could open up the pipelines for more credit and lending.

Here’s the back story. The Federal Deposit Insurance Corporation, or FDIC, is responsible for insuring the bank deposits of tens of millions of Americans. A big chunk of their reserve fund comes through fees charged to banks to participate in the FDIC insurance program.

Banks generally have no problem with the FDIC’s insurance deal; having federally backed insurance is a big selling point to a bank trying to woo customers.

The problem though stems from the lousy economy and the collapse of a burgeoning number of U.S. banks.

Overall, the FDIC insures the deposits of about 8,400 banks through February 2009. The FDIC has already closed 36 U.S. banks in 2009, compared to 25 in 2008 (during the last big banking crisis the FDIC closed 523 U.S. banks in 1989).

When the FDIC closes a bank, it either tries to pursue a new buyer for the failed bank (as it did for Washington Mutual when JP Morgan Chase (Stock Quote: JPM) stepped in to take over) or closes the bank and pays off the deposits for up to $250,000 in assets.

• The Five Largest Banks Closed by the FDIC in 2008
• Washington Mutual — $307 billion estimated assets
• IndyMac Bank — $32 billion estimated assets
• Downey Savings and Loan — $12.8 billion estimated assets
• Franklin Bank, SSB — $5.1 billion estimated assets
• First National Bank of Nevada — $3.4 billion estimated assets.

-- Source: FDIC

Consequently, in a troubled financial environment where the FDIC is paying out billions in deposit insurance to customers, it’s going to need more money. The agency estimates it will spend about $70 billion by 2013 in insurance payouts to customers at failed banks. As a result, the FDIC’s insurance fund is at an all-time low at $18.9 billion at the end of 2008, as opposed to $52.4 billion at the end of 2007.

To raise cash, the FDIC imposes those fees on member banks to help fund the FDIC’s insurance reserve. Earlier this year, the FDIC voted to increase bank fees to 20 cents for every $100 in bank assets. The fee represents a one-time charge on top of the $15 billion or so that U.S. banks pay the FDIC in insurance fees.

Predictably, bank executives, reeling from cash flow problems stemming from bad loans, hit the roof and told the FDIC they couldn’t afford the fee hike. Over 14,000 letters, mostly from smaller banks arguing that it was the bigger banks that triggered the banking crisis were sent to the FDIC, mostly by executives and staffers at U.S. banks.

But instead of squaring off against banks and holding the line, the FDIC, spurred by an on offer by the U.S. Treasury to borrow more money from the government, gave in and cut the fee to five cents for every $100 in assets. The FDIC also instituted a weighted fee structure that will force bigger banks (which tend to take a bigger chunk out of the FDIC’s insurance fund) to pay more in fees than smaller regional and community financial institutions.

For consumers, the FDIC’s decision to back off on higher insurance fees is a positive development. With more cash on hand, banks can more easily extend credit to customers, thus boosting the economy and setting the stage for a safer, healthier and more profitable banking climate.

Call it the “trickle down” theory. Less money paid out in bank fees, in the end, should mean more cash for banks, and more borrowing opportunities for customers.

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