The failure of Silicon Valley Bank (svb), which has shocked the tech sector, is today's top story. Companies that had their money in svb are now concerned that their payments would bounce or that their employers might fail. Nevertheless, how valid are these worries? We'll look at what caused svb to fail, what it means for IT entrepreneurs, and what the future may hold in this blog article.
The Tech Boom and Silicon Valley Bank
We saw a tech boom over the past ten years that was far more significant than the dot-com bubble. All you needed to secure an investment from a venture capital firm was the next big idea for a disruptive app since central banks were providing easy money and low interest rates. And Silicon Valley Bank is the best company to entrust your money with.
When interest rates were low, things were wonderful for SVB. With over $175 billion in customer deposits, it rose to become the 16th largest bank in the US. They placed this money in bonds and mortgage-backed securities, generally with maturities of 10 years or longer, in order to earn a return. The issue is that bond values fall when interest rates rise, which resulted in a mismatch between assets and liabilities. When word spread about this, everyone began to panic and begin to withdraw their money from the bank in an Old-Fashioned rush.
The Fallout
To reduce their losses, the government, which guarantees deposits up to $250,000, promptly intervened and closed the bank. You don't lose anything if you have less than $250,000 in this bank because it is completely insured. Yet, the majority of tech businesses probably have more money in the bank than that, and at least 85% of deposits were not insured. With that money, you might get a haircut. The scenario is still developing, and a number of different things could occur.
A larger bank might pounce and buy svb, guaranteeing all of the deposits. If that fails, perhaps legislation will be drafted to steal funds from taxpayers to bail out these Internet firms, just as they did with the banks in 2008. If that doesn't succeed, though, the FDIC can simply sell off all of svb's assets and then distribute a future dividend to uninsured depositors. Shareholders will essentially lose everything, but depositors will recover the majority, if not the entirety, of their money. They were bailed in and now stand to lose everything.
Contagion
The most intriguing aspect of this predicament, though, is how it can spread or what type of economic shocks it might cause for other Silicon Valley companies. Because more than $3 billion of its cash reserves were exposed to svb, USDCoin (USDC), one of the most popular stable coins in the cryptocurrency space, depegged as a result. Because these stable coins are essential to maintaining liquidity in the cryptocurrency markets, this is extremely terrible for the industry. There would be a ton of collateral harm if it were to completely collapse. Although Terra's UST collapse last year was not great, the collapse of USDC would be much worse.
You wonder if there are any other banks that are in a similar predicament as svb when it comes to contagion. It was particularly vulnerable to tech companies, but the main issue here is rising interest rates, and it's probable that other banks made such errors as well.
How It Affects the Average Software Engineer?
Other smaller startups are claiming that they won't be able to pay their employees, which sounds bad but in reality they'll probably be able to find some kind of temporary solution to continue operating as normal until the FDIC figures things out. Many companies, like Roku and Roblox, have disclosed their exposure and should have no problem continuing their operations as normal.
Longer term
This is unquestionably negative news for the market for tech jobs. In an industry where burning through large amounts of cash until you are acquired or go public is common, running out of money is never a good thing. To make matters worse, recent inflation was worse than anticipated, which means the fed won't be able to lower interest rates anytime soon. There are really only two possible outcomes. No matter what happens with interest rates—whether they remain high and usher in a second Great Depression or they go below zero and force the dollar to hyperinflate into worthless toilet paper—AI will eventually replace all of these tech employment.
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