Public confidence in the banking system has been shaken by what New York economist Henry Kaufman has called "the present-day casino-like atmosphere of the markets." Nowhere is this situation more critical than in the thrift industry, beset by bad loans and record failures.

Commercial banks, of course, are not exempt: there have been 95 closed down already this year by the FDIC. But the failures of state-insured S&Ls in Maryland and Ohio, a disease from which federally insured S&Ls are not exempt, have put a spotlight on troubles of the thrift industry.

The Federal Savings and Loan Insurance Corp. has an insurance fund that is supposed to cover any losses up to a certain amount (currently $100,000) by depositors at the nation's 3,000 S&Ls. This "insurance" program, it should be noted, represents an obligation of the government to the depositor, not to the S&L (or to banks, in the case of the Federal Deposit Insurance Corporation).

But the FSLIC is running out of money. The best that Washington can do, in the words of banking consultant Carter Golembe, "is to put on three Band-Aids, light five candles, and pray."

The hard fact is that the FSLIC insurance fund has dropped to $1.5 billion against potential losses that now are estimated by knowledgeable people in the industry to run many times that amount over the next several years. The FSLIC admits that it is choking on $3 billion worth of bad loans -- mostly real estate -- taken over from defunct S&Ls. In Dallas at a recent convention of the U.S. League of Savings Institutions, Norman Raiden, general counsel of the league, cited another $3 billion in bad loans and foreclosed property held by thrift institutions that are still operating but that ultimately may be closed down.

At least 300 S&Ls still doing business are insolvent because their debts are greater than their assets. They should have long since been closed by the government, but they've been allowed to stay alive for a simple reason: the FSLIC hasn't had enough cash to make good on its insurance commitment to the depositors involved. There probably are 200 more S&Ls that technically are solvent but aren't making a profit.

What have government regulators done in the face of this potential disaster? At the Dallas convention, the Federal Home Loan Bank Board (which supervises the S&Ls) announced that it would set up a new organization, based in Denver, to liquidate the $3 billion in bad assets already owned by the FSLIC. If it gets every nickel out of these assets, which is highly doubtful considering what the FSLIC describes as the "bizarre" nature of some of them, the FSLIC still won't have enough money to cover future potential losses.

Golembe points out that, in any case, deposit "insurance," whether offered by the FDIC or FSLIC, is not the true insurance system most depositors have been led to believe, but is more in the nature of a federal guarantee "of the immediate availability of their funds (up to a stated maximum) in the event of an institution's closing." What is most important to the depositor is the knowledge that the guarantee (to him or her) is backed by the full faith and credit of Uncle Sam.

Yet banks and thrifts advertise this guarantee, with the subtle implication that the public is dealing with a "safe" institution. But neither the bank nor the S&L is itself "insured," nor has the management been certified as honest or even clever.

Last month at a meeting of the Wisconsin League of Financial Institutions in Milwaukee, Golembe had some tough words for the FSLIC and the regulatory agencies. The sole function of insurance, he said, is "to protect the unsophisticated, low-income person against one of the vicissitudes of life -- namely, the possibility of the failure of his depository institution."

It is not the function of the insurance system to serve "as an economic stabilization force, requiring an implicit or explicit 100 percent guarantee of all liabilities of all depository institutions -- and perhaps of other financial institutions as well."

Yet, we all know what happens: banks as well as S&Ls advertise that funds deposited with them are "guaranteed" by either the FSLIC or the FDIC. Then some of them go out and do crazy and irresponsible things with the depositors' money.

As Kaufman has suggested, government supervisors and regulatory agencies should develop and publish a credit rating for the banks and S&Ls they deal with. That would give depositors more real confidence than an "FDIC" or "FSLIC" seal over the front door.

In Golembe's view, large depositors should be put at risk, with the insurance function limited to "protecting the little guy's rent and grocery money." That would give FSLIC a new perspective. It wouldn't sit there, allowing ill-managed S&Ls to continue in operation while it tries to build up a fund big enough to take care of the casualties.