Nov 2 (Reuters) - Business demand for bank loans weakened last quarter for the first time in more than a year, a Federal Reserve survey showed on Monday, though banks said some borrowers were seeking cheaper financing elsewhere.
"As important reasons for weaker demand, banks cited decreasing customer investment in plant or equipment products and customer borrowing shifting to more attractive bank or nonbank funding sources," the Fed's quarterly Senior Loan Officer Opinion Survey found.
The last time the survey showed softening demand for commercial loans was in the second quarter of 2025, but banks did not then cite borrowers moving to other lenders as a reason. Though back then the report contained no suggestion that customers may still be investing but simply seeking cheaper loans from other sources.
A government report last week showed business spending on equipment surged at a 20.9% annualized rate last quarter, adding more to GDP growth than in any quarter in six years.
Bank loan officers responding to the Fed survey reported little change in lending standards for commercial and industrial loans to large and midsized firms, but tighter standards for smaller firms. They also said that while they tightened lending requirements for riskier loans, they "eased or left basically unchanged most queried terms for C&I loans," the report said.
That the Fed survey did not show banks continuing to tighten lending standards for large firms, as they have for most of the past couple of years, is "encouraging," analysts at Oxford Economics wrote.
"This is another reason to bet on the broadening out of business investment beyond AI," the analysts wrote.
The report was among pieces of data that Fed policymakers had in hand when they decided to keep short-term borrowing costs unchanged at their meeting on October 27-28.
For banks that said they had tightened commercial lending standards, the most frequently cited reasons were "a less favorable or more uncertain economic outlook and a worsening of industry-specific problems," the report said.
Banks also reported sharply weaker demand for residential real estate and a slide in demand for auto loans, but the strongest uptick in demand for credit card borrowing in four years.
Reporting by Ann Saphir; Editing by Sanjeev Miglani
