Good morning. Deregulation contributed to Silicon Valley Bank’s collapse.

Stopping the fallout

The collapse of Silicon Valley Bank and others — and the government’s rescue over the weekend — left many of us again rushing to understand the arcane details of the financial system. It can be maddeningly complex, so I want to use today’s newsletter to explain some of the basics.

First, the latest: Bank stocks plummeted yesterday, hitting midsize and smaller institutions in particular. Other financial markets gyrated as well, despite U.S. policymakers’ emergency help for customers of the closed banks. “It didn’t put calm back in the system,” said my colleague Maureen Farrell, who covers business.

Why does this matter to everyday Americans? After all, SVB is relatively small and most of us keep no money in it.

The short answer is the potential for wider fallout. When banks collapse, other people sometimes fear that their own banks and investments will follow. Even healthy banks don’t keep enough cash on hand to pay out all depositors, so if too many people panic at once and pull out their money — a classic bank run — it could lead to broader financial and economic calamity. And that is what the Biden administration and the Federal Reserve are trying to stop: a financial crisis largely prompted by plunging confidence.

The collapse

How did we get to this point? To answer that, I need to dive into more detail about Silicon Valley Bank.

As its name suggests, the bank portrayed itself as focused on the leading edge of technology. And it served thousands of tech firms. Yet SVB invested their money in something much less exciting, as Paul Krugman wrote: U.S. bonds, effectively I.O.U.s from the federal government.

Because the federal government has always paid its bills, U.S. bonds are widely considered the safest investment. SVB’s experience shows there are moments when even these safe investments may not pay off. The details get technical, but they’re worth unpacking to understand what went wrong.

Bonds are effectively money that the government borrows from buyers — the public — before paying them back later, with interest. Market conditions and the Federal Reserve, America’s central bank, help determine that interest rate.

When SVB bought bonds, interest rates were very low. Since then, the Federal Reserve, which sets certain influential rates, increased those to combat rising prices. Now, new bonds can carry interest multiple times higher than those SVB bought.

Imagine, then, that you want to buy bonds today. You would want the newer bonds because they have a higher payout. So when SVB needed to sell bonds, to raise cash that it could use for its customers’ withdrawals, it could do so only for a discount, taking a loss.

The bank failed to follow basic financial advice: Diversify your portfolio. “It’s not fraud,” said Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics. “But it’s an extremely risky, and obviously risky, strategy.”

In the past few weeks, venture capitalists and other wealthy customers on social media and in private chats started discussing concerns that SVB could no longer pay its depositors. Some began to move their money out of the bank, and the situation spiraled quickly. “Once you start asking, ‘Are we having a bank run?,’ it’s too late,” my colleague David Enrich, a business editor, said.

A regulatory failure

Financial regulations are supposed to stop these kinds of crises. But Silicon Valley Bank’s problems were not caught until it was too late — which many experts say was a result of insufficient oversight. (Here’s what to know about how your own money is covered.)

Under pressure from banks in 2018, Congress passed bipartisan legislation that Donald Trump signed into law shielding smaller banks, like SVB, from more stringent rules. The banks argued that they were so small that they posed little risk to the broader financial system.

SVB’s collapse and the aftermath suggest the banks’ claims were wrong: Even smaller bank failures can threaten the financial system as a whole, prompting some experts — but not all — to call for the federal government to get more involved.

Controlled slowdown

To readers of this newsletter, the Federal Reserve’s involvement in containing the fallout of Silicon Valley Bank’s collapse may be puzzling. The Fed, after all, has been raising interest rates to slow the economy. An economic slowdown inherently involves businesses, including banks, failing.

The Fed’s concern is that the bank collapses could go too far and pose bigger systemic risks beyond SVB. Think of it this way: You can stop a runaway car by blowing out its tires, potentially causing a crash. But it would be better if the car stopped by simply braking. Officials are trying to get the economy to brake to a safer speed — one in which inflation isn’t so high.

The economic slowdown that the Fed hopes for would still affect everyday Americans, in both lower prices and also potentially higher unemployment rates. But that outcome is better than an uncontrolled bank run that topples the financial system and takes the rest of the economy, and your 401(k), down with it.

More news

• Smaller U.S. banks are battling market turmoil as customers withdraw deposits and investors dump stocks.
• The Fed could become more cautious about raising interest rates to control rising prices. New inflation data comes out today.
• SVB’s collapse has exposed the tech industry’s vulnerabilities.
• The bailouts after the 2008 financial crisis arguably saved the global economy. But a popular backlash continues to haunt Washington. (Biden won’t utter the word.)
• SVB was the biggest bank to fail since 2008. This chart explains how it compares to other collapses.
• Today’s episode of “The Daily” also delves into the bank’s collapse.

• The U.S., Britain and Australia will jointly develop a fleet of nuclear-powered submarines in the Pacific, as China bolsters its own navy.
• Michael Cohen, Trump’s former fixer, testified to the grand jury investigating Trump’s role in paying hush money to a porn star.
• Senator Mitch McConnell was discharged from the hospital after a fall last week.
• In Iowa, an early primary state, Trump attacked Ron DeSantis, accusing him of wanting to decimate Social Security and Medicare.
• DeSantis, who is likely to run for president, told Tucker Carlson that defending Ukraine shouldn’t be a priority for the U.S.
• Biden said, “No more drilling on federal lands, period.” A global energy crisis and pressure from Alaska’s lawmakers changed his mind.

• Rich Russians are avoiding war and building new lives in Dubai.
• Thousands of Ukrainians who fled to the U.S. last year can extend their stay.

• A late-winter storm is moving through the Northeast, with a forecast of heavy snow.
• Gov. Kathy Hochul scrapped a planned AirTrain to La Guardia Airport after a review found that buses would be cheaper.
• A man convicted of killing eight people on a Manhattan bike path in 2017 will get life in prison rather than the death penalty after jurors deadlocked.
• A California court upheld a law that classifies gig drivers as contractors and not as employees. It’s a win for Uber.
• China’s new premier needs to lift economic growth, but he is stepping into a role with diminished power under Xi Jinping.
• Bulldozing and claims of kidnapping: The Cayuga Nation, a tribe in upstate New York, is at war with itself.

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Closer to reality

The Smithsonian’s American Women’s History Museum is early in development. But the institution took a major step yesterday, naming Nancy Yao, the president of the Museum of Chinese in America in New York, as its founding director.

More than two years after Congress approved its creation, the Women’s History Museum has yet to decide on an architect, a location or its collection. But it already has more than $55 million in pledged donations from philanthropists, including Melinda French Gates, Tory Burch and the Walmart billionaire Alice Walton.

The pangram from yesterday’s Spelling Bee was flexion. Here is today’s puzzle.

Thanks for spending part of your morning with The Times. See you tomorrow. — German

Matthew Cullen, Lauren Hard, Lauren Jackson, Claire Moses, Ian Prasad Philbrick, Tom Wright-Piersanti and Ashley Wu contributed to The Morning. You can reach the team at themorning@nytimes.com.