BANKS ARE failing faster than the federal deposit insurance system expected, and the insurance fund is already dangerously low. Now L. William Seidman, chairman of the Federal Deposit Insurance Corp., projects losses over the next two years showing the fund dropping still further. It is urgently important to build the fund up again, as Mr. Seidman correctly warns. The question, as usual, is how to do it.

The immediate cause of the bank failures is a weakening economy that results in more loan defaults, especially in real estate. But behind that cyclical pressure there is a deeper and more troubling trend. Banking over the years has become far less reliably profitable than it once was. The evolution of the world's financial system has taken away from the banks many lines of business that were solidly profitable for them. They have responded by getting excessively deeply into kinds of lending that are much riskier -- foreign lending in the late 1970s, real estate lending in the late 1980s. Now, with only a mild downturn in the national economy, a lot of them are in serious trouble.

The strain on the deposit insurance system is not an isolated crisis that can be resolved by tinkering with actuarial ratios and increasing the premiums that banks pay. It needs to be seen clearly as a symptom of widespread vulnerability in an industry that is operating under obsolete laws, with barely adequate capital and increasingly severe competition.

The insurance premiums are now being raised, but they can't go up much farther. The premiums come out of banks' profits, and the insurance fund can hardly expect to strengthen itself with strategies that weaken the banks it insures. That point is made forcefully by three economists, James R. Barth, R. Dan Brumbaugh and Robert E. Litan, in a study for the House Subcommittee on Financial Institutions. Their calculations suggest that even a mild recession could easily swamp the banks' deposit insurance fund and force a rescue with taxpayers' money, as in the case of the S&Ls.

All of these recent hearings, analyses and forecasts are providing a kind of overture to the Treasury Department's proposals due next month for deposit insurance reform and the legislation that will certainly follow. It is entirely clear that the Treasury can't limit itself to deposit insurance alone, but will have to address the state of the whole banking industry. Without substantial structural changes, the decline of American banking is not reversible. Without stable and prosperous banks in this debt-ridden economy, a strong expansion of business and a rising standard of living are unlikely.