Banks Loosened Business Credit Past Its Historical Midpoint, Citing Nonbank Competition
The Fed's July survey, released August 3, puts every other loan category at the tight end of its range since 2005, including the credit banks extend to nonbank lenders.
The survey. On August 3 the Federal Reserve released the July 2026 Senior Loan Officer Opinion Survey, covering the second quarter. Responses came from 56 domestic banks and 18 U.S. branches and agencies of foreign banks.1 On the quarter's change, the answer was quiet: banks reported "basically unchanged" standards for commercial and industrial loans to firms of all sizes, the survey's label for a net percentage inside a narrow band.1
The level. The interesting reading was not the change but the position. In a special question benchmarking today's standards against their range since 2005, banks said "the current levels of standards are currently at the tighter end of the range for all loan categories except C&I loans, for which standards are generally easier than their midpoints."1 Business credit is the single exception to an otherwise tight book.
The reason. The survey asked banks that eased why they did it. "Among banks that reported easier standards or terms for C&I loans, a major net share cited more aggressive competition from other banks or nonbanks as an important reason for doing so," with significant net shares also citing secondary-market liquidity, higher risk tolerance and a better economic outlook.1 The same survey found standards on loans to nondepository financial institutions, the category that includes business credit intermediaries and consumer credit intermediaries, sitting at "the tighter ends of their historical ranges."1
Why this is the operator story. Read those two findings together and they describe a vise. Banks are running their loosest posture relative to history in exactly the product that competes with alternative business lending, and they say competition from nonbanks is a major reason. They are simultaneously holding the credit lines extended to nonbank lenders at the tight end of their own history. The competitive pressure and the funding constraint are pointed at the same balance sheets.
What Alternative Business Lenders Need to Know
What did the Fed actually report on August 3?
Two things that point in opposite directions. The quarterly change in commercial and industrial standards was, in the survey's own language, "basically unchanged" for firms of all sizes, and that is the number most coverage will lead with.1 The second finding came from a special question the Fed does not ask every quarter, benchmarking the current level of standards against the full range observed since 2005. There, C&I was the lone outlier: standards at the tighter end of the historical range for every loan category except commercial and industrial, where they are "generally easier than their midpoints."1 The survey names the specific segments where that easier-than-midpoint reading applies: syndicated or club loans to investment-grade firms, and non-syndicated loans to large and middle-market firms.1 That precision matters and we come back to it below.
Why does "basically unchanged" understate what happened?
Because a flat quarter is a very different signal depending on where you are standing when it arrives. Run the three surveys back to back. In January, covering the fourth quarter of 2025, "modest net shares of banks reported having tightened standards on C&I loans to firms of all sizes."6 In April, covering the first quarter, the identical finding: "modest net shares of banks reported having tightened standards on C&I loans to firms of all sizes."3 Then this quarter the tightening stops, and the special question reveals the resting place is easier than the 2005-to-date midpoint. Two quarters of incremental tightening did not move business credit out of the loose half of its own history. Demand moved with it: a moderate net share of banks reported stronger demand for C&I loans from large and middle-market firms this quarter, against basically unchanged demand from small firms.1 Compared with a year earlier, the Fed notes standards have eased across all C&I loan types.1
Where is the easing actually concentrated?
Upmarket, and this is the part worth being honest about rather than selling. The easier-than-midpoint reading attaches to investment-grade syndicated credit and to large and middle-market non-syndicated loans.1 Small firms are not where the loosening shows up: their standards were basically unchanged on the quarter, and demand from them was basically unchanged too.1 That split is not a one-quarter artifact. Back in January, covering the fourth quarter of 2025, the survey found the same shape: "a moderate net share of banks reported stronger demand from large and middle-market firms, while demand from small firms remained basically unchanged on net."6 Small-business borrowing demand has not been showing up at banks for at least three quarters, which is worth sitting with: it is the clearest evidence in this data that the small-ticket demand alternative lenders serve is not simply bank demand in disguise. If you write $25,000 advances against daily card volume, no bank in this survey just moved into your lane. If you write $2 million to $25 million asset-based, equipment or middle-market facilities, a bank with a lower cost of funds and a loosened structure box did.
What are bankers saying about why?
They are saying it out loud on earnings calls, in language the survey data cannot capture. Frost, the $54 billion-asset San Antonio bank, told analysts on its second-quarter call that when it loses deals now it loses them on structure rather than price, and its chairman and chief executive Phil Green called it "a bit of a race to the bottom on some of these structures," warning that loosening structure is "dangerous to do that poorly" and that "you could end up working through some problems that you didn't want to."4 On pricing he was blunter: "What is it about obscenity the Supreme Court said? 'You know it when you see it.' And some of the pricing can be pretty obscene."4 Frost still grew average loans 7 percent year over year to $22.6 billion in the quarter while declining to chase, and Green framed its own competitive flexibility as relationship-driven: "We're not looking to just get volume by having low price."4 Note how precisely this matches the Fed's wording. The survey asked about "standards or terms," and the competition Green describes is being fought on terms, through longer interest-only periods and longer tenors, not on rate. This is also not new for Frost. On its second-quarter 2025 call a year earlier, Green said loans lost to competitors over structure had hit their second-highest level ever, described competitors extending interest-only periods and lengthening terms, and warned that "the grass is never greener on the other side of the fence of good credit quality."5 This is one bank's view from one state, and it is anecdote rather than aggregate, but it is a named executive describing on the record, across two consecutive years, the exact mechanism the aggregate just measured.
What happened to the credit banks extend to nonbank lenders?
It stayed tight, and it has been tight for consecutive quarters. In the July survey, using a baseline that runs back to 2011, "significant net shares of banks reported standards as being at the tighter ends of their historical ranges" for lending to mortgage credit intermediaries, business credit intermediaries, private equity funds, consumer credit intermediaries and other nondepository financial institutions.1 That is not a new development this quarter. The April survey, which introduced the expanded NDFI questions, already found significant net shares of banks tightening standards for business credit intermediaries, consumer credit intermediaries and other NDFI loans, with moderate net shares tightening for mortgage credit intermediaries and private equity funds.3 Those two categories, business credit intermediaries and consumer credit intermediaries, are the Fed's own taxonomy for the lenders reading this. The warehouse line, the revolver behind the forward-flow, the bank facility supporting the securitization ramp: that is the credit the Fed is describing, and the banks providing it are holding it at the tight end of a fifteen-year range while easing for the borrowers those same lenders underwrite.
What about the consumer side of the book?
Tightening, mildly, and with demand falling away. A modest net share of banks reported tighter standards on credit card loans, while auto and other consumer standards were basically unchanged.1 On demand, a moderate net share reported weaker demand for auto loans, with credit card and other consumer demand basically unchanged.1 Residential real estate demand was weaker across categories, and commercial real estate showed a split: moderate and modest net shares of banks eased standards on nonfarm nonresidential and multifamily loans respectively, while construction and land development standards were unchanged and CLD demand was weaker.1 The composite picture is a banking system that has picked its growth lane. Business credit and income-producing commercial real estate get the easing. The consumer book and the construction book do not.
What should credit and treasury teams do with this?
Three things, and only one of them is about the borrower pipeline. First, re-underwrite your funding assumptions before your renewal, not during it. If your facility sits with a bank that is holding NDFI standards at the tight end of a fifteen-year range while competing hard for direct C&I business, your line is competing internally against a loan the bank would rather book directly, and advance rates and covenant headroom are where that preference shows up. Ask your lender directly where NDFI exposure sits against their internal limits this quarter. Second, segment your competitive response by ticket size rather than applying it across the book, because the survey says the easing is concentrated in investment-grade and large and middle-market credit.1 Your larger facilities are in a structure fight, not a price fight, and Green's account tells you the specific terms being conceded: interest-only periods and tenor.4 Decide in advance which of those you will match and which you will lose the deal over. Third, put this survey on your calendar as a standing input. The SLOOS is a public federal file, published quarterly with downloadable measure tables, and the next release will cover the third quarter.1 2 Any credit committee can pull the C&I and NDFI series themselves and watch whether the gap between the two closes, rather than waiting for a vendor to characterize it.
Our Opinion
The headline most outlets will write from this survey is that nothing much changed, and on the quarter that is defensible. We think the more useful reading is the level rather than the delta. When a banking system tells its central bank that business lending is the only product it runs easier than its own historical midpoint, and separately that it is holding the lines it extends to nonbank lenders at the tight end of a fifteen-year range, it has described a strategy without naming it. It wants the asset and it is less interested in financing someone else to hold the asset.
We also think the small-firm demand line is the most under-read number in the release. For three consecutive surveys, banks have reported stronger demand from large and middle-market borrowers and flat demand from small ones. The convenient interpretation is that small businesses are not borrowing. The likelier one is that they are borrowing somewhere else, and have been for long enough that it no longer registers as a bank data point at all.
There is also a caution buried in Green's comment that deserves more attention than it will get. Competing on structure rather than price is how credit cycles hide their mistakes, because a loosened covenant or an extended interest-only period does not show up in a yield table the way a rate concession does. Banks are conceding terms into the one category they already run easier than its historical midpoint, and into strengthening demand from larger borrowers. If that combination ends the way it usually ends, the alternative lenders who held structure through this stretch will be the ones still funded when the banks step back, and the banks will step back through exactly the NDFI lines they are already holding tight.
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Headlines You Don’t Want to Miss
The Federal Reserve Banks of Dallas and New York announced August 5 a pilot survey of the U.S. private credit direct lending market, run jointly by the Dallas Fed's Research Department and the New York Fed's Open Market Trading Desk.7 8 The banks put the direct lending market at more than $1.3 trillion, comparable in size to the high-yield bond and broadly syndicated loan markets, and note that unlike public credit there is limited visibility into new private lending activity.10 The New York Fed says the survey will "provide insights into the availability of credit, credit provision, the evolution of lending standards in private credit markets, and the implications for the broader economy and monetary policy," segmented into upper middle market (borrower EBITDA above $100 million), middle market ($30 million to $100 million) and lower middle market (under $30 million).9 Participation is voluntary and "the findings will not be used for supervisory purposes."10 It launches after the third quarter closes, with aggregate findings due in the first quarter of 2027.9 Read this next to the lead. The same institution that just published a detailed read on bank credit is openly saying it cannot see the nonbank half, and is building the instrument to fix that. Voluntary and non-supervisory is how these things start; the SLOOS itself is now the most-cited bank lending series in the country. If your firm falls in the lower middle market bucket, decide your participation posture before the request arrives rather than after.
Upstart is standing up a national bank in early 2027 that becomes the "primary originator" of its loans, displacing the partner banks that currently serve as lender of record, American Banker reported August 5.11 The economics being moved are disclosed: partner institutions took $11.2 million in premium and trailing fees in the first half of 2026, up from $8.1 million a year earlier, and Upstart will not pay those fees on loans its own bank originates. CFO Andrea Blankmeyer told investors "we expect pretty quickly to move the bulk to all of our originations through to Upstart Bank," and Stephens analyst Kyle Joseph said the charter "will take economics from their conduit banks."11 Upstart's first-half funding mix ran 61 percent institutional investors, 31 percent lending partners and 8 percent its own balance sheet; for scale on how far this has already travelled, Cross River Bank originated 51 percent of platform loans in 2022 and generated 45 percent of Upstart's revenue that year.11 This is the same vertical-integration move we have tracked through Klarna, Enova, OppFi and LendingClub, but pointed at a different victim. Previously the charter play was about deposit funding; here it is about recapturing origination economics from the sponsor bank. If you originate through a partner bank, model what happens to that relationship's pricing when the bank's largest program volume walks.
The Ninth Circuit ruled July 15 (Docket No. 25-2073) that the False Claims Act's public disclosure bar did not defeat a whistleblower suit alleging a mortgage lender misrepresented its eligibility and falsified its employee headcount to obtain and have forgiven a PPP loan of nearly $5 million, according to an August 3 analysis by Orrick, Herrington & Sutcliffe.12 Be precise about posture: the court reversed a dismissal and allowed the claims to proceed. Nothing has been proven, the allegations remain allegations, and the relator's theory has not been tested on the merits. The legal point is the narrow one. The district court had treated the borrower's industry classification code appearing on a government website as a public disclosure sufficient to bar the suit; the appeals court held it had "impermissibly assessed the relator's eligibility theory 'at the highest level of generality.'"12 For anyone who touched PPP as originator, agent or servicer, the operational read is that broad categorical data published by the government does not immunize a file from a qui tam claim, and the limitations window on FCA claims runs long. If you retained PPP files, confirm your eligibility and headcount documentation is still retrievable and that your record-retention clock is not shorter than your exposure.
Sources
1 Federal Reserve | July 2026 Senior Loan Officer Opinion Survey on Bank Lending Practices, released August 3, 2026
2 Federal Reserve | July 2026 SLOOS chart data and measure tables (public, rerunnable series)
3 Federal Reserve | April 2026 Senior Loan Officer Opinion Survey (first quarter 2026 comparison)
4 Banking Dive | Frost CEO warns of 'race to the bottom' on Texas loan structure, Caitlin Mullen, August 3, 2026
5 Banking Dive | Frost CEO: Lending competition heating up, August 1, 2025 (second quarter 2025 call)
6 Federal Reserve | January 2026 Senior Loan Officer Opinion Survey (fourth quarter 2025 comparison)
7 Federal Reserve Bank of Dallas | Dallas and New York Fed to launch pilot survey of the private credit market, August 5, 2026
8 Federal Reserve Bank of New York | Pilot Survey of the Private Credit Market, August 5, 2026
9 Reuters | Two regional Fed banks to launch pilot survey of private credit market, August 6, 2026
10 PYMNTS | Federal Reserve Readies Pilot Survey to Gauge Private Credit Markets, August 5, 2026
11 American Banker | Who loses when Upstart becomes its own lender, Carter Pape, August 5, 2026
12 Orrick, Herrington & Sutcliffe via JD Supra | Ninth Circuit finds False Claims Act public disclosure bar did not preclude PPP fraud claim, August 3, 2026
