At bank hearings, Congress should ask about credit conditions

First came the spectacularly quick bank failure. Then came the fears of a financial contagion. Now get ready for the congressional hearings.

Federal financial watchdogs will appear before two Capitol Hill committees in the week ahead, beginning with the Senate Banking Committee on Tuesday. FDIC Chairman Martin Gruenberg, Federal Reserve Vice Chair for Supervision Michael Barr, and Nellie Lang, the Treasury undersecretary for domestic finance, are scheduled to appear. The same three will follow their Senate hearing with testimony to the House Financial Services Committee on Wednesday.

They will be pressed on why regulators didn’t spot trouble at Silicon Valley Bank and Signature Bank sooner, how they made decisions to come up with their rescue efforts, and what impact possible new rules could have on the banking industry.

Oh, and there’ll be plenty of pontificating about who’s to blame; Democrats will point to the Trump administration easing banking oversight, Republicans will blame President Biden’s COVID-19 spending programs for fueling inflation, forcing the Federal Reserve to quickly raise interest rates.

Both sides of aisle will use the bank failures and fears fueled by them as validation for their positions on the approaching debt ceiling. Democrats warn economic confidence is too shaken to withstand a down-tothe-wire showdown on efforts to raise the borrowing limit. Republicans contend inflation, caused by massive government spending, forced the Fed to hike its interest rate fast, triggering the banking collapses.

Expect the witnesses to reassure Americans that the banking system is “sound and resilient,” as the Fed described it last week after raising its target short-term lending rate by another quarter of a percentage point.

The Fed’s monetary policy isn’t the direct subject of these hearings, but don’t be surprised if the committee members use their time to criticize the bank’s higher rates actions.

What they should also be asking the banking regulators about is credit conditions for consumers and corporations. How are higher rates affecting access to credit? What changes are banks making to their loan considerations in response to the collapse of SVB and Signature Bank?

The banking failures have set off worries about a credit crunch. Investors certainly are concerned, and Congress should be as well.