US banks expect stronger loan demand in 2026, Fed survey shows

Feb 2 (Reuters) - Banks expect demand for business loans across all categories to strengthen this year after improving last quarter, a Federal Reserve survey showed on Monday, with most lenders saying they expect lower interest rates ?and higher spending or investment needs will drive that trend.

Business loan demand from ?large and medium-sized firms in the fourth quarter was the ?strongest it has been since the second quarter ?of 2022, ?the Fed's quarterly Senior Loan Officer Opinion Survey found. Loan demand from small firms ?was flat, after having declined ?for each of the prior three quarters.

The survey also showed that while banks generally tightened lending standards ?for businesses in the fourth ?quarter, they ?generally did not expect further tightening this year, removing what had been a limiting factor for credit growth last ?year.

On net, the survey showed, banks reported being more likely to lend to firms that have high exposure to artificial intelligence.

Meanwhile households expressed weaker demand for most kinds of loans last quarter, the survey showed, with demand for car loans ?at ?its weakest since the first quarter of 2024.

Banks said they generally expect an increase in delinquencies and charge-offs ?for business loans to small firms and for auto-loan borrowers, while they expect the quality of loans to large firms to hold steady.

The Fed last week left the benchmark short-term borrowing rate in its current 3.50%-3.75% range, and it signaled a stabilizing labor market and higher-than-optimal ?inflation would likely keep it from cutting rates again for some time. Policymakers had the loan officer survey in hand when they made their rate-setting ?decision.?

(Reporting by Ann Saphir; Editing by Cynthia Osterman and Aurora Ellis)