For the past two years, a dominant financial narrative has been that Nondepository Financial Institutions (NDFIs) and private credit are taking commercial market share from a retreating banking sector. Data from this week's Federal Reserve Senior Loan Officer Opinion Survey (SLOOS) flips this script. Traditional banks aren't losing to private credit—they are being asked to bankroll it.
Looking at the evolution of SLOOS responses over 2026, we see a clear pivot from broad, cautious optimism early in the year to sharp, defensive risk segmentation heading into the fourth quarter. Here are my top three takeaways on where the friction is building:
- Shadow Banking Squeeze: Banks are tightening standards for NDFIs and private credit given a “less favorable or more uncertain economic outlook and a deterioration in the financial strength of NDFI borrowers.” At the same time, however, demand from private equity funds and business credit intermediaries is picking up, which banks report is being driven by increased working capital needs and mounting refinancing pressures.
- Small Business Penalty: Banks are tightening lending standards for small businesses while leaving them “basically unchanged” for large and middle-market firms. This threatens to force smaller borrowers into the private credit market, which is experiencing its own friction (see point 1).
- Cost-of-Living Credit Crutch: Consumers are increasingly leaning on credit cards to pay for goods and services to bridge the gap of elevated living costs. This reliance on revolving debt to absorb inflationary pressures is happening precisely at a time when small banks are pulling back on subprime credit card approvals.
By simultaneously tightening standards on NDFIs, small businesses, and subprime borrowers, traditional banks are essentially trapping risk on the periphery. Are there concerns about a systemic boomerang effect, where this risk circles back to banks from a different direction? The $76 trillion question is who holds the leverage heading into the 2027 refinancing wall?
SLOOS Highlights:
- Divergence in commercial and industrial (C&I) lending standards among small vs. large and middle-market firms: Banks noted that C&I lending standards were “basically unchanged” for large and middle-market firms but had tightened for small firms. Banks also reported tightening collateralization requirements and use of interest rate floors for small firms, as well as standards for premiums charged on riskier loans for firms of all sizes.
- Softening demand for C&I loans: Banks cited weakening demand driven by declining investment in plant or equipment products and a shift toward alternative funding sources.
- Tightening lending standards for Commercial Real Estate (CRE) loans: Banks noted tighter standards and weaker demand across all categories: construction and land development, nonfarm nonresidential, and multifamily properties.
- Weakening demand in residential real estate lending: Banks reported weaker demand across all residential real estate loan categories, while demand for HELOCs remained unchanged. Meanwhile, lending standards were basically unchanged for most mortgages, with the notable exception of tightening standards for subprime borrowers.
- Consumer lending standards and terms were “basically unchanged” for credit card loans, auto loans, and other consumer loans: Banks reported tightening credit limits on credit card accounts and the minimum required credit score for auto loans. Banks also reported stronger demand for credit card loans but weaker demand for auto loans, while demand for other consumer loans remained basically unchanged.
- Banks are actively segmenting consumer risk: Over the past year, banks have become more likely to approve credit card applications for super-prime and prime borrowers, while actively reducing approvals for subprime borrowers. Stronger demand for credit card loans over the past year was attributed to changes in customers’ spending needs in response to price changes for goods and services they face.
- Nondepository Financial Institutions (NDFIs) are facing friction: Banks tightened standards across the board for loans to NDFIs, including private equity funds, mortgage and business credit intermediaries, and consumer credit intermediaries, citing “a less favorable or more uncertain economic outlook and a deterioration in the financial strength of NDFI borrowers.”
For more details: https://www.federalreserve.gov/data/sloos/sloos-202610.htm
