As Congress digs into banking woes, lawmakers should ask if banks are tightening credit

First, the spectacularly quick bank failure. Then came the fears of a financial contagion. Now come the congressional hearings.

Federal financial watchdogs will appear before two Capitol Hill committees this week 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 California’s Silicon Valley Bank and Signature Bank sooner, how they made decisions to come up with their rescue efforts, and what effect possible new rules could have on the banking industry.

Oh, and there will be plenty of pontificating about who’s to blame. Democrats will point to the Trump administration easing banking oversight put in place after the 2008 recession, Republicans will blame President Joe Biden’s pandemic spending programs for fueling inflation forcing the Federal Reserve to quickly raise interest rates.

Both sides of the aisle will use the bank failures and fears fueled by them as validation for their positions on the approaching U.S. debt ceiling dilemma this summer. Democrats warn economic confidence is too shaken to withstand a down-to-the-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 the banking system is “sound and resilient,” as the Fed described it last week after raising its target short-term lending rate by another one-quarter of 1%.

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 central bank’s higher rate actions.

What they should also be asking the banking regulators about is credit conditions for consumers and corporations. How are higher interest 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, too.

Tom Hudson is the chief content officer at WAMU public radio station in Washington, D.C.