Bank Incentives and the Effect of the Paycheck Protection Program

Abstract

We assess the role of banks in the Paycheck Protection Program (PPP), a large and unprecedented smallbusiness support program instituted as a response to the COVID-19 crisis in the United States. In 2020, the PPP administered more than $525 billion in loans and grants to small businesses through the banking system. First, we provide empirical evidence of heterogeneity in the allocation of PPP loans. Firms that were larger and less affected by the COVID-19 crisis received loans earlier, even in a within-bank analysis. Second, we develop a model of PPP allocation through banks that is consistent with the data. We show that research designs based on bank or regional shocks in PPP disbursement, common in the empirical literature, cannot directly identify the overall effect of the program. Bank targeting implies that these designs can, at best, recover the effect of the PPP on a set of firms that is endogenous, changes over time, and is systematically different from the overall set of firms that ultimately receive PPP loans. We propose and implement a model-based method to estimate the overall effect of the program and find that the PPP saved 7.5 million jobs.

What Do 25 Million Records of Small Businesses Say about the Effects of the PPP?

“…For our analysis of the instrumental variables used in the literature, we also use the FDIC's Summary of Deposits (SOD) and Call Reports. All of the data are processed as in Joaquim and Netto (2021).…”

“…The CBP/SUSB data are also used to compute the fraction of eligible firms receiving PPP loans in a locality. Employment and labor force participation at the county level by month are obtained from the Bureau of Labor Statistics' (BLS) Local Area Unemployment Statistics (LAUS) database (and processed as in Joaquim and Netto (2021)). For instrumental variable estimation, we use data from the Federal Deposit Insurance Corporation's (FDIC) Summary of Deposits (SOD) to measure small businesses' access to community banks, which were more active in PPP lending, especially early on, using the share of bank branches in a county that belong to community banks.…”

“…9 A partial list of such studies includes Humphries et al (2020), Erel and Liebersohn (2022), Chodorow-Reich et al (2022), Hassan et al (2020), Elenev et al (2020), Faria-e Castro (2021),Cororaton and Rosen (2021),Barrios et al (2020),Balyuk et al (2021),Bartlett and Morse (2021),Chetty et al (2020),Li and Strahan (2021), andAmiram and Rabetti (2020) Hubbard and Strain (2020). use the D&B data to estimate the PPP's effect on employment.10 For the employment effects of the PPP at the firm and regional levels, seeDalton (2021),Kurmann et al (2021), Faulkender et al (2021,Granja et al (2022),Autor et al (2022a,b),Doniger and Kay (2021),Bartik et al (2020b), andJoaquim andNetto (2021), among others.…”

Did High Leverage Render Small Businesses Vulnerable to the COVID-19 Shock?

“…In one of the earliest studies, Bartik et al (2020) use an instrumental variables (IV) approach to better estimate the causal effect of the PPP and find a modest boost to employment, as do Granja et al (2020). Joaquim and Netto (2021) develop a model to formalize the intuition that banks would optimally choose to make PPP loans first to firms that benefit those banks the most. They find that these firms happen to be existing customers, larger firms, and firms less affected by the pandemic.…”

The Main Street Lending Program: Who Borrowed and How Have They Benefited?

“…Given that many MSLP borrowers were also eligible for the PPP, from which many MSLP firms obtained loans that were expected to be largely forgivable, we include indicators for PPP loan recipients depending on when a PPP borrower received that funding. In light of the analysis by Joaquim and Netto (2021) and Joaquim and Wang (2022), we classify the PPP borrowers into three groups: early (those that received loans before the initial funding ran out), middle (those that received loans after newly appropriated funding arrived on April 27 and through May 2, 2020, when the PPP lending volume slowed to a trickle), and late (all the rest). 23 The unprecedented fiscal support provided to small businesses and households in the wake of the COVID-19 outbreak means that the size of the stimulus received relative to the pre-pandemic size of the local economy likely also mattered for the overall economic condition in a locality.…”