Small Business Lending Under the PPP and PPPLF Programs

Abstract

We examine the effects of the Paycheck Protection Program (PPP) and the PPP Liquidity Facility (PPPLF) on small business lending. The PPP was launched under the CARES Act of March 2020 to provide support for small businesses under the COVID-19 pandemic, while the PPPLF was an affiliated program administered by the Federal Reserve to facilitate the maintenance of liquidity among banks participating in the PPP. We use Call Report data to examine the contributions of these two programs on small business and farm lending by individual commercial banks in the United States. As participation in the programs was associated with lending to small businesses directly, we use an instrumental variables (IV) approach to identify a causal effect of the programs on lending based on historical bank relationships with the Small Business Administration that administered the PPP. Our results suggest that both the PPP and the PPPLF had a marked positive effect on growth in small business and farm lending over the first half of 2020. However, while the PPP seemed to encourage greater lending growth by banks of all asset sizes, only small- and medium-sized bank lending was significantly influenced by participation in the PPPLF. We also find that while both programs had significant positive effects on small business lending, they did not influence small loans to farms over this period, which is likely due to a structural feature of the PPP. Finally, while participation in both programs increased bank balance sheets, we find that risk-adjusted bank capital ratios actually improved with PPP and PPPLF participation.

Government Loan Guarantees during a Crisis: The Effect of the PPP on Bank Lending and Profitability

“…However, their analysis examines only large bank responses whereas we examine only smaller community banks. Finally, our paper is also closely related to works by Anbil, Carlson, and Styczynski [2021] and Lopez and Spiegel [2021], both of which find that better positioned banks made more PPP loans and that the PPPLF helped to bolster participation, particularly among smaller banks. A key difference between our paper and these works is our emphasis on banks using the PPP program to reduce capital at-risk rather than emphasizing a relationship lending channel.…”

Who Supplies PPP Loans (and Does It Matter)? Banks, Relationships, and the COVID Crisis

“…Figure 2 shows that PPP lending intensity correlates strongly with small-bank profitability during 2020 (relative to 2019). The program contained both an implicit interest rate subsidy (a 1% interest rate, which exceeds the yields on risk-free Treasuries at the time) and an origination 2 Lopez and Siegel (2021) study the role of the Federal Reserve's Paycheck Protection Program Liquidity Facility on bank lending to small business. 3 We focus only on the PPP program during the peak of the COVID crisis in the spring and summer of 2020.…”

Banking Research in the Time of COVID-19

“…Berger, Karakaplan, and Roman (2021) similarly find strong positive effects especially for smaller banks and smaller businesses. Marsh and Sharma (2021) also find significant increases in lending by small banks, while Lopez and Spiegel (2021) find increases in small business and farm lending by all bank sizes. In contrast, another study using the Federal Reserve's Y-14 data on conventional loans over $1 million suggests strong substitution effects.…”