September 30, 2008 (LPAC)--The failures of Washington Mutual and Wachovia, the two largest bank failures in U.S. history, have shown that the FDIC is simply unable to cope with the problems facing the U.S. banking system. As of mid-year, the FDIC had $45 billion in its deposit insurance fund, while Washington Mutual had $182 billion in deposits and Wachovia had $451 billion. That's why the regulators did not close WaMu until it had arranged a sale to J.P. Morgan Chase, and did not close Wachovia at all, but provided what the FDIC calls open-bank assistance to sell it to Citigroup. In both cases, the buyers took the deposits and some, but not all, of the assets. Normally, the FDIC takes banks into receivership, and runs them until it either liquidates them or cleans them up and sells them off to another institution, but that process only works for small banks.

In the case of Wachovia, the FDIC for the first time in its history invoked a "systemic risk exception" to allow it to assume a large part of the risk of Wachovia's $312 billion mortgage-related securities exposure, without having to close the bank.

As a result of these transactions, the big three U.S. banks, Citigroup, J.P. Morgan Chase and Bank of America, now control 31 percent of U.S. bank deposits, and that figure should increase as the banks consolidate further through failures and mergers.

Despite its inability to handle its existing responsibilities, the FDIC today requested that Congress increase the $100,000 per account limit on deposit insurance. FDIC chairman Sheila Bair said the move was designed to address the "crisis of confidence" in the banking system.