One of the government’s key relief policies aimed at supporting households and businesses during the COVID pandemic is the paycheck protection, or “PPP,” program. This program provides forgivable loans to small businesses. The program has been implemented through the banking system as the application process and loan funds are channeled through banks. A recent blog post from the Federal Reserve Bank of New York (FRBNY) used data from the first wave of the PPP program to draw attention to the role played by community banks. In this post, we examine the role played by banks of all sizes in the PPP program. We focus on the total amount of PPP loans approved because this is a direct measure of the amount of relief being provided to the economy during the pandemic. Our findings show that banks of all sizes have played an important role in channeling pandemic relief to households and businesses through the PPP program. Importantly, the addition of a single large bank branch in a state is estimated to raise total PPP lending in that state by roughly $10 million.
The FRBNY Finding
The FRBNY blog post uses the initial data from the first wave of PPP lending to present a plot of the percentage of small businesses that received a PPP loan in each state against the share of deposits held by community banks in each state. We reproduce this result in Figure 1 below except that we use more complete data that include both the first and second wave of PPP lending. Also, in our analysis, a community bank is defined as any bank with less than $10 billion in total assets, a commonly used definition for the sector. As shown in Figure 1, and as reported in the FRBNY blog post, states with a higher community bank deposit share exhibit a higher fraction of small businesses who receive PPP loans. We note, however, that the strength of the relationship is somewhat weaker in the more complete data than in the first wave data presented by the FRBNY (the correlation between the two variables is 74% in the first wave data and drops to 59% in the more complete data).
An Alternative Measure of PPP Performance
The FRBNY analysis measures the performance of the PPP program in terms of the “percentage of small businesses that received a PPP loan.” We question this measure on economic grounds. The PPP program is intended to provide economic relief to small businesses and households throughout the country. The amount of relief provided to the economy is more directly measured by the total dollar amount of PPP lending than by the percentage of small businesses receiving a loan. As an example, if 70 percent of small businesses receive a loan, but these firms are all relatively small with few employees and only generate $10 billion in PPP lending, then – while vital to those businesses and their employees – this provides less relief to the economy than if 50 percent of small businesses receive a loan, but these businesses have more employees and generate $15 billion in PPP loans. In the latter case, more relief has been provided for paying rent and buying groceries and other necessities during the pandemic.
In Figure 2, we show three plots. Each plot depicts the total amount of PPP lending in each state and the number of bank branches of banks within a given size category in each state. We use the number of bank branches rather than the amount of deposits, as in the FRBNY analysis, because the number of branches is likely a better proxy for the information network between banks and small businesses as well as the availability of local bank staff to answer PPP-related questions and process applications. The greater the branch network in each state, the greater ease with which a PPP application can be processed.
The left-hand panel of Figure 2 shows the relationship between total PPP lending and the number of community bank branches in each state. The middle and right-hand panels show the relationship between total PPP lending and the number of bank branches of mid-sized banks (banks with total assets between $10 billion and $100 billion), and large banks (banks with total assets greater than $100 billion). All three plots show a positive relationship between the number of bank branches and total PPP lending. States with more branches, of banks of all sizes, receive more PPP loans. In addition, it is important to recognize that Financial Services Forum members have a significant number of bank branches throughout the country. As of 2019, Forum members operate over 15,000 branches across the country. These data, however, do show that the strength of the relationship increases with larger banks. As an example, the correlation between community bank branches and total lending is 63 percent while the correlation between large bank branches and total PPP lending is 95 percent. Nevertheless, the data show that as banks of all sizes increase their branch numbers in each state, PPP lending increases.
Finally, Table 1 presents the information in Figure 2 in tabular format using a multiple regression. The table shows the results of a multiple regression that includes the number of bank branches of each size category considered in Figure 2. The results in Table 1 corroborate the findings in Figure 2. Banks of all sizes contribute to PPP lending across the country. Specifically, adding one more community bank branch in a state tends to raise total PPP lending by $2.6 million, adding one more mid-sized bank branch increases total PPP lending by $10.3 million, and adding one more large bank branch increases total PPP lending by $9.6 million. Of course, this analysis is relatively simple and does not control for other factors that may determine total PPP lending, but does show that the entire banking sector contributes meaningfully to implementing the PPP program.
The PPP program is an important part of our nation’s response to the COVID pandemic. Extending relief to small businesses and households is critical to support people and the economy as we engage in social distancing. The PPP program is being implemented through the entire banking system. In particular, Forum members have extended nearly $73 billion in loans to over 700,000 small businesses within the PPP program. An analysis of the most complete PPP lending data confirms that banks of all sizes are contributing meaningfully to PPP lending. As a whole, the banking system is doing its part to support households and businesses through these difficult times and will be ready to further support the economy in the recovery.