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Democrat Sherrod Brown, chair of the Senate Committee on Banking, Housing, and Urban Affairs, questions Martin Gruenberg, left, and Michael S. Barr, right. (Tom Williams/Getty Images)
This week, members of Congress from both sides of the aisle lobbed questions, and outright accusations, at regulators who they claim dropped the ball as Silicon Valley Bank took on a reckless risk profile in the years preceding its collapse in March.

A critical takeaway from these hearings is that regulatory systems are ill-suited to sufficiently assess the niche banking practices of lenders like SVB and Signature Bank, which enabled mismanagement and reckless risk-taking by members of the leadership teams at both banks. Regulators' inability to adapt their processes to modern banking practices is a piece in the puzzle of why the Fed's playbook failed.

"Recent events have showed that we must evolve our understanding of banking, particularly in light of changing technologies and emerging risks," Michael S. Barr, the Federal Reserve's vice chair for supervision, said in his opening remarks to the House Financial Services Committee. Barr added that the Fed's focus on bank size ignored risks posed by SVB's "nontraditional business model."

The bank run took hold so swiftly in part because SVB catered to a specialized depositor base that's highly connected, and the rise of tech-enabled banking facilitated a $42 billion outflow in a single day. SVB's specialization in the VC ecosystem meant that startups' high cash burn and declining venture investment hit the bank harder than others. SVB also had an unusual portfolio of Treasury and agency bonds, so when interest rates jumped up, its investments lost value.

"Clearly, many [SVB] customers forgot their own financial prudence," charged Rep. French Hill, R-Ark., during the session.

As early as November 2021, Fed supervisors were warning of problems at SVB and flagged six "matters requiring attention." But these issues were able to fly under the radar for months before facing aggressive scrutiny. By October 2022, when Fed supervisors raised concerns with SVB's CFO, the bank had been without a chief risk officer since April and had been issued with a composite liquidity rating of 3, or "not well managed."

"These events are a wake-up call," said Rep. Maxine Waters, D-Calif.

It took even longer for a fully-fledged review of the bank's practices to be launched. In mid-February of this year, Barr was made aware of SVB's interest rate risks. He was still awaiting the outcome of a full review when the bank run started.