U.S. bank regulators are expected to propose on Tuesday that banks prepay three years of regular assessments to replenish the dwindling deposit insurance fund, according to a source familiar with the matter.

Such an option would give the Federal Deposit Insurance Corp more liquidity to deal with the sharp increase in bank failures, while banks would not be required to report the expense of the fees until they would normally be due.

The source, speaking anonymously because the regulator discussions have been private, said the FDIC would likely propose for the banking industry to prepay $12 billion per year in assessments, for a total of $36 billion.

The board of the FDIC is meeting on Tuesday to propose alternatives to charging the banking industry hefty emergency fees to avoid having the balance of the insurance fund hit zero.

The industry has said such upfront fees could hurt banks just as their balance sheets are starting to recover from the recent financial crisis.

FDIC Chairman Sheila Bair has said the agency is considering alternatives to the upfront emergency fees, including prepayments of regular assessments, tapping the FDIC's $500 billion line of credit with Treasury, and borrowing from healthier banks to rebuild the fund.

It is unclear what combination of options the FDIC board will propose to put out for public comment on Tuesday, as it seems regulators have narrowed the menu of options.

An FDIC spokesman declined to comment.

The source said the total amount of prepaid assessments could reach higher than $36 billion if the FDIC decides to ask the bank industry to also prepay special assessments.

The FDIC is exploring ways to replenish the insurance fund that safeguards bank deposits after a sharp increase of bank failures has been draining the fund.

So far this year 95 U.S. banks have failed, compared with 25 last year and only three in 2007.

Those failures have whittled the balance of the insurance fund down to $10.4 billion at the end of the second quarter from $45 billion a year earlier. The FDIC notes it has an additional $32 billion in reserves to handle failures over the next year.

(Reporting by Karey Wutkowski; editing by Carol Bishopric and Andre Grenon)