Every quarter the Federal Reserve asks a few dozen banks how they are changing the terms on their loans, and every quarter the middle market reads the answers for a signal. The April 2026 Senior Loan Officer Opinion Survey, which covered the first quarter and drew responses from 64 domestic banks and 18 U.S. branches and agencies of foreign banks, carried the usual message on commercial and industrial credit: modest net shares of banks reported tightening standards on C&I loans to firms of all sizes, with higher premiums on riskier loans, tighter covenants and tighter collateralization requirements woven through the results.1
The more consequential development sat lower in the release. For the first time, the survey put a dedicated set of questions to banks about their lending to nondepository financial institutions — the private credit funds, business development companies, specialty finance platforms, mortgage and consumer credit intermediaries and private equity funds that now sit between the banking system and the borrower. The answers describe a banking sector growing quietly more guarded about the very ecosystem it has spent a decade financing.1
That matters because the nonbank channel is no longer a rounding error. The Secured Finance Network estimates secured-finance outstandings reached roughly $12.2 trillion as of the end of 2024, up about 35% since 2022, with leveraged lending alone accounting for some $4.37 trillion outstanding and cash-flow lending another $1.76 trillion.2 When banks recalibrate how they lend against that machinery, the repricing travels downstream to sponsors and portfolio companies.
A First Look at the Plumbing
The Fed reported that, on net, banks tightened standards across every category of nondepository financial institution loan over the past year. The tightening was most pronounced — described as significant net shares in the survey’s own language — for loans to business credit intermediaries, consumer credit intermediaries and other nondepository financial institutions, with moderate net shares tightening on loans to mortgage credit intermediaries and to private equity funds.1
The terms moved in the same direction. Banks reported tightening essentially all of the terms surveyed on these loans, most commonly through higher premiums on riskier credits, stricter covenants, shorter maximum maturities, tighter collateralization and lower maximum sizes on credit lines. The banks that pulled back pointed to a less favorable or more uncertain economic outlook and to increased borrower credit risk as the reasons for doing so.1 For a market that has relied on bank warehouse lines and subscription facilities to lever its returns, that is the sentence to underline.
The survey’s vocabulary is precise enough to be worth translating. When it describes a net share as modest, it means a net percentage greater than five and no more than 10; moderate runs above 10 and up to 20; significant runs above 20 and below 50; major is 50 or more.1 So the report is not describing a credit event. It is describing a consistent, one-directional drift toward caution across a part of the system the Fed had never before measured this way.
Demand Rising into a Tighter Door
The counterintuitive finding is that demand from these institutions is climbing even as the terms harden. Banks reported stronger demand across all categories of nondepository financial institution loans, with significant net shares reporting stronger demand from private equity funds specifically. The banks attributed the stronger appetite to the increased liquidity needs of those institutions, to borrowing migrating from other banks, and to improved investment opportunities.1
That combination — more demand meeting more selective supply — is the mechanism by which spreads widen and structures tighten without any headline default. A nonbank lender that needs a larger or cheaper facility to fund its own book is meeting a bank counterparty that wants a higher premium, a shorter tenor and more collateral. The negotiating gap does not close; it gets papered over at a price, and that price ultimately shows up in what the end borrower pays.
None of this has yet dented the aggregate lending numbers. Commercial and industrial loans at all commercial banks stood at about $2.90 trillion in May 2026, up from roughly $2.74 trillion in January, so the C&I book kept expanding through the very quarter in which banks told the Fed they were tightening.3 Tighter standards and a growing balance sheet are not contradictions; they are what a late-cycle bank looks like when it keeps lending but demands more for each new dollar.
The demand picture on ordinary business lending was more mixed than the nonbank one, and the split is instructive. Banks reported basically unchanged C&I demand overall, but moderate net shares of large banks reported weakening demand from small firms while modest net shares of other banks reported stronger demand from large and middle-market firms, and a net share of banks noted an increase in inquiries about the availability and terms of new credit lines.1 Borrowers are still shopping; they are simply shopping into a market where the terms have hardened and where the definition of a large or middle-market firm — annual sales of $50 million or more, in the survey’s framing — captures much of the sponsor-backed universe.
The Commercial Real Estate Contrast
The nonbank tightening is easier to read against what banks did on commercial real estate, where the posture was the opposite. In a separate set of special questions asked every April for the past decade, banks reported having eased or left basically unchanged almost all of the terms on their commercial real estate loans over the past year, most commonly through higher maximum loan sizes, narrower spreads over the cost of funds and longer interest- only periods.1 On the collateral they can see and value, in other words, competition pushed banks toward looser terms.
The reason they gave for that easing is the tell. The most frequently cited driver of looser commercial real estate lending policies, reported by major net shares of banks, was more aggressive competition from other banks and nonbank lenders.1 The same nonbank ecosystem that banks are lending to more cautiously is also the competitor forcing them to ease elsewhere — a two-sided relationship in which the bank is at once financier and rival to the private credit and specialty finance platforms reshaping the market.
What the Caution is Signaling
The banks are responding to a real signal, not an imagined one. The past year brought a run of high-profile bankruptcies inside private credit alongside continued tightening in traditional bank lending, and lenders have been watching portfolios closely as a result. The secured-finance industry’s own read is that credit conditions remain idiosyncratic rather than systemic — trouble concentrated in individual names rather than spreading through the market.4 Bank behavior in the survey is consistent with that view: selective retrenchment aimed at exposures, not a wholesale exit.
For the dealmaker, the practical takeaway is that the cost of the leverage sitting beneath a fund’s returns is being renegotiated in a direction that favors the bank. Sponsors financing through nonbank lenders should assume their counterparties’ own funding is getting more expensive and more conditional and should price that into hold assumptions and refinancing timelines rather than treating warehouse capacity as a given.
Conclusion
The Fed’s decision to ask banks directly about their nondepository counterparties is the story. A market segment large enough to warrant its own set of survey questions is a market segment regulators intend to watch, and the first readings show banks already leaning toward tighter terms and stricter collateral even as demand from those counterparties rises. The lending has not stopped, and the data gives no reason to forecast that it will. But the terms are moving, quietly and in one direction, and the participants who plan around that drift now will be better positioned than those who wait for a louder signal. •
1“The April 2026 Senior Loan Officer Opinion Survey on Bank Lending Practices,” Board of Governors of the Federal Reserve System, May 4, 2026.
2“SFNet Study: Secured Finance Surges Past $12 Trillion,” Secured Finance Network / Business Wire, Feb. 10, 2026.
3“Commercial and Industrial Loans, All Commercial Banks” Federal Reserve via FRED, Data through May 2026.
4“SFNet Data Highlights Strong Year-End Performance in ABL and Factoring,” Secured Finance Network / Business Wire, Apr. 15, 2026.
Rita E. Garwood is editor in chief of ABF Journal.