Four decades after its creation, Silicon Valley Bank was the 16th largest bank in the U.S. It took just a day and a half for it to fall apart. This is the second biggest bank failure that's ever happened in the United States. Once seen as a major tech banking player, SVB's stunning collapse spurred other bank closures, rattled global markets, and threatened the livelihoods of startups across the country.
So what went wrong? Silicon Valley Bank opened in 1983 to serve fledgling tech companies. Eventually, nearly half of the country's venture capital-backed technology and life sciences companies would rely on SVB. Roku, Roblox and many others put millions into the bank, helping SVB become one of the nation's largest. Some of these clients would definitely be considered risky.
These are companies that move quickly and their money moves quickly. When things sort of went off the rails, they were quick to move their money out of the bank. After the banking crisis that triggered the Great Recession, President Barack Obama signed the Dodd-Frank Act, making banks like SVB face stricter regulation.
It is designed to make sure that everybody follows the same set of rules. But eight years later, during the Trump administration, some of those regulations on smaller banks were rolled back. By liberating small banks from excessive bureaucracy, and that's what it was, bureaucracy, we are unleashing the economic potential. of our people.
Some of the rules were rolled back for these banks that had less than $250 billion in assets. So you have the biggest banks like Bank of America and Chase. Those have very strict rules, but the ones that are a step below have looser rules. Two years later, SVB was flooded with cash as businesses deposited more during the pandemic. Deposits tripled in two years to $189 billion, making 2021 SVB's most profitable year ever.
Our core business continues to fire on all cylinders. So SVB Financial took that cash and bought tens of billions of dollars of longer-term U.S. treasuries and government-backed mortgage securities, products usually considered safe. People and companies just put money in their bank accounts and banks said, we have to do something with this. We have to earn some income on it. So they bought bonds with it.
SVB's securities portfolio rose about $100 billion in under a year. After SVB had stockpiled that $100 billion plus in bonds, all of a sudden interest rates rose. Committee anticipates that ongoing increases in the target range for the federal funds rate will be appropriate. What happens when interest rates rise is bond prices fall. Banks, including SVB, that were holding on to a lot of bonds, were sitting on a bunch of losses.
Soon, SVB's investments were worth $17 billion less than their fair value. And so all of a sudden, the gap between what SVB had paid for those bonds and what they were worth on paper had jumped to more than $17 billion. And that was the key risk that would eventually lead to SVB's undoing. Making matters worse, as interest rates rose, new deposits shrank, falling nearly $30 billion from March to December.
Talking about the end of 2022, CEO Greg Becker told CNBC, We kind of felt that bottoming out. We kind of felt that we were kind of at that lower point. The vast majority of the bank's deposits were held in just 37,000 accounts that held more than $250,000, the amount insured by the FDIC.
Then, in a regulatory filing on March 8th, SVB announced it sold a large chunk of securities at a loss of about $1.8 billion to help it cover that decline in deposits. The regulatory filing that Wednesday sparked a lot of fear. The stock fell a tremendous amount, which is never a good sign. And investors were already on edge.
Crypto-focused bank Silvergate had just announced it would wind down and return all deposits. So the bottom was about to fall out. Startup CEOs began receiving urgent calls from panicked venture capital investors. He was out of breath, like he had just run a marathon. And he said, take your money out of Svb, go into your account.
Take your money out as soon as possible. What started as a trickle of withdrawals quickly turned into a tidal wave as word spread across the valley. More and more startups pulled their cash.
It was a run on the bank and the beginning of the end for SVB. The next day, the bank's stock price went into freefall as customers tried to withdraw $42 billion in deposits. SVB ran out of cash.
All of a sudden, everyone's saying, whoa, wait a minute. This bank is risky. The bank has enough money to cover deposits if they come out in sort of a peaceful, orderly fashion. When everyone's racing for the exits at once, it doesn't.
That day, regulators seized the bank. The FDIC said in a statement that customers would have full access to their insured deposits in three days. But the bank had more than $151 billion worth of deposits at the end of 2022 that weren't insured. They were over the $250,000 limit. Two days after SVB's collapse, a second bank with a different set of problems, Signature, failed and was seized by regulators.
The third largest failure in history. And now people are starting to worry about other banks as well. It's very much kind of a whack-a-mole situation right now. Federal officials, state officials, everyone's in sort of this unenviable position of trying to shore up confidence in the banking industry.
So it doesn't turn into an even bigger panic. On Sunday, March 12th, regulators announced that even uninsured deposits over $250,000 from the two banks would be covered. On Monday, March 14th, Signature told clients that due to the U.S. Treasury, Federal Reserve and FDIC, all deposits were not at risk. SVB's focus on Silicon Valley made it uniquely vulnerable to a run.
Its fortunes were really tied to the fortunes of this one industry. What's more, this is an industry that has flighty deposits. You can't really rely on this short-term funding necessarily to support these long-term investments and bonds.
Now, some, like President Joe Biden, are blaming the Dodd-Frank Act rollback for the failures. I'm going to ask Congress and the banking regulators to strengthen the rules for banks to make it less likely this kind of bank failure would happen again. With investigations into SVB underway, the bank's clients will see their money returned.
But shareholders are out of luck. When asked about the possibility of bailing out Silicon Valley Bank, the Treasury Secretary said, We're not going to do that again. But we are concerned about depositors and are focused on trying to meet their needs.