US commercial banks see credit spread compression into 2026

By Vriti Gothi

US commercial banks and credit unions are entering 2026 with stronger liquidity positions but facing intensified competition, narrowing credit spreads, and rising client expectations around digital capabilities, according to new industry analysis from Q2 Holdings, Inc.

Drawing on 2025 calendar-year data from Q2 PrecisionLender’s proprietary database covering more than 130 financial institutions ranging from community banks to top 10 US banks, the findings highlight a sector adjusting to a supply-demand imbalance. Liquidity growth has outpaced the recovery in loan demand, increasing competitive pressure and compressing margins.

Industry deposits have fully recovered from the recent liquidity crisis and reached record levels. Financial institutions had offered competitive pricing to stabilize balances, absorbing higher costs to prevent outflows. As liquidity improved, funding costs eased and net interest margins strengthened. However, excess liquidity relative to loan growth has intensified competition for quality commercial relationships.

“Q2 PrecisionLender data shows that liquidity growth has outpaced loan demand across the industry, intensifying competition and driving an erosion of credit spreads,” said Gita Thollesson, principal strategic business advisor at Q2. “As spreads narrow and excess liquidity builds, pricing discipline and relationship-level insight have become critical.”

Loan demand, which was initially subdued amid uncertainty around tariffs and capital investment, rebounded later in the year as policy clarity improved, leading to fuller lending pipelines.

Beyond balance-sheet dynamics, commercial clients are demanding faster payments, real-time access to financial data, and integration with enterprise resource planning (ERP) and accounting systems. Efficiency, operational visibility, and control are emerging as key differentiators in banking relationships. Instant payment rails continue to gain share, while digital banking platforms for small businesses are evolving into more integrated business hubs.

Fraud risk is also accelerating in both frequency and sophistication. Institutions are responding by deploying layered defense models, artificial intelligence tools, and improved data integration to detect threats earlier and streamline resolution processes.

The analysis also points to renewed merger and acquisition activity under a more favorable regulatory backdrop, with transactions increasingly viewed as technology plays in addition to balance-sheet expansions. Platform modernization, FinTech integration, and AI-enabled capabilities are seen as critical to delivering post-deal efficiencies.

The findings are published in Q2’s January 2026 State of Commercial Banking report, which also references data from Q2’s Centrix Positive Pay solution and public research from the Federal Deposit Insurance Corporation and the Federal Reserve.