NEW YORK -- When the Federal Reserve Board signaled its growing concern about a sick economy by cutting the banks' discount rate -- the first such move in more than four years -- it was taking a stitch to control the bleeding.

But what the ailing banking system needs is a major medical procedure, like surgery.

The change in the discount rate, from 7.0 to 6.5 percent, allows banks to cut their costs for borrowing money from the Federal Reserve by half a point. The Fed's intention was to stimulate a reduction in the banks' "prime rate" and other interest charges to customers. If the Fed's hope is fulfilled, it would tend to induce investors and consumers to spend a bit more freely, easing the pain of recession.

But as much as a loosening of the Fed's tight money strings has been needed (historically, the Fed always moves too little and too late to counter recession), the troubles of the banking industry run much deeper.

And although the conventional wisdom in Wall Street is that those troubles are rooted in regulations affecting the "structure" of banking, handicapping it from competing with foreign banks and other financial institutions in this country, the basic virus assailing the banks is really something else: unconditional deposit insurance that has enabled banks, just as it did the savings and loans, to let greed supplant judgment. It's almost certain that the public will be confronted with a series of confidence-jarring bank failures over the next year.

Additional Federal Reserve steps toward an easier monetary-policy regime are now likely. Investment banker Henry Kaufman expects that the federal funds rate will be cut as low as 6.5 percent in early 1991, followed by another cut in the discount rate to 6 percent.

"That will ameliorate present conditions," Kaufman said in an interview. But to tackle the banks' underlying problem, and help restore faith in the banking system, the Bush administration and Congress must deal with the question of deposit insurance.

The absolute government guarantee that goes with deposit insurance was the cancer that ruined the S&Ls and added a potential $500 billion to the long-term budget deficit that taxpayers must pay off. It encouraged greedy S&L managers to make speculative loans and investments.

On what one hopes will be a smaller scale, bank managers were seduced in the same way. The essential difference is that the disease has been diagnosed at an earlier stage, and if the right therapy is enforced quickly, there's a good chance for recovery.

Edward J. Kane of Ohio State University, who warned about the pending S&L disaster long before Washington woke up to it, refers to the "black magic of federal guarantees" for banks as well as thrift institutions. "To appreciate the magic, we must understand that deposit insurance is not strictly insurance at all," Kane says. The government's guarantee of repayment of deposits up to $100,000 is not, like typical insurance, against a specified set of risks. Instead, "deposit insurance represents an unconditional third-party guarantee of a firm's capacity to repay a particular class of its debts."

Worst of all, interpretations by federal regulators enabled individuals to obtain not a single $100,000 chunk of deposit insurance, but the same amount on multiple accounts in banks and S&Ls. This ran Uncle Sam's liability into the millions for those clever enough to read the fine print. Counting indirect or implicit guarantees for government-sponsored enterprises dealing with housing or student loans, total federal-insurance liabilities run to $6 trillion.

Deposit-insurance reform is urgently needed, and will be tackled by the administration and Congress in the next session. But there is a question of how gutsy the government is going to be. Federal Deposit Insurance Corp. Chairman L. William Seidman has recommended that insurance premiums paid by the banks vary with the risks they take.

One idea would permit banks (and S&Ls) with enough of their own capital at stake to pay lower rates. Another FDIC suggestion is that government insure only 90 percent of the deposits, but require private insurance for the balance.

Kaufman would attack the problem boldly by differentiating among commercial banks for insurance purposes, setting up three classes. The first, a narrow group, would be allowed to invest only in high-grade securities and would qualify for full deposit insurance. The second would be more broadly based institutions, rated double-A: Their deposits would be insured, but at some percentage less than 100. And the third type of bank could invest in anything and everything, but its deposits would not qualify for any insurance.

It seems to me that a Draconian approach, maybe even tougher than Kaufman's, is necessary. The $100,000 insurance level on an account in any institution is too high. Needless to say, the outrageous gimmickry that allows a single depositor to have a bunch of insured accounts must be scrapped. Premiums must be related to the riskiness of a given bank's operations, so that well-run banks aren't picking up the check for a fly-by-night operation.

Above all, the Bush administration and Congress need to move fast.