A recent research paper written by economists at the University of Chicago and MIT based on data through April 15, 2020, analyzed lending patterns among banks participating in the Paycheck Protection Program (PPP), a government program to provide money to small businesses impacted by the economic fallout from COVID-19. The paper reported that the top four U.S. banks (Bank of America, J.P. Morgan Chase, Citibank and Wells Fargo), all Financial Services Forum members, accounted for under three percent of all PPP activity and argued that this activity was unusually low relative to the amount of small business loans made by these banks. The paper also reported that the average PPP loan made by the largest banks was substantially higher than the average loan size in the program overall. Finally, the paper analyzes the distribution of PPP activity across the U.S. and finds that the program did not channel PPP funds into those areas most adversely affected by the pandemic.
In this post, we provide updated measures of large bank PPP participation based on data through May 2020. The results based on more complete data show that the top four U.S. banks account for a share of PPP activity that is between two and half times and six and a half times higher than that reported by the research paper. We also address the paper’s comparison to small business lending and argue that such comparisons are inappropriate given the unique nature of the PPP program relative to traditional business lending. When we compare the PPP activity of large banks to their 2019 participation in the more closely related SBA 7a program, we find that large banks stepped up their activity in the PPP program. Finally, while the manner in which PPP activity was distributed throughout the U.S. during the pandemic is an important public policy issue that speaks to the design of the PPP program, we note that this is a program design issue that is unrelated to the participation of banks in the PPP program.
A Look at the Data: Then and Now
Table 1 reports several key activity statistics from both the PPP and SBA 7a programs. The PPP statistics reflect data from April (top row) as well as more complete data through May (bottom row) of 2020. The SBA 7a statistics are based on activity in the small business administration’s (SBA) government guaranteed small business loan program from the 2019 fiscal year (the SBA reports on a fiscal year basis). The SBA 7a program has long provided government guaranteed and federally subsidized loans to small businesses throughout the country.
As shown in the table, the activity measures of the top four banks identified in the research paper increased markedly between April and May. The share of the PPP program’s dollar volume of lending increased from just over five percent to just under 14 percent. Likewise, the share of PPP loans accounted for by the top four banks grew from under three percent to nearly 17 percent between April and May. These updated and more complete data show that the top four banks account for a much more significant portion of PPP activity than reported in the early data cited by the research paper. The final column of Table 1 shows the average loan size of PPP loans made by the top four banks. Again, the updated and more complete data show that the average loan size is roughly $92,500, which is substantially lower than the amount reported in the research paper based on April data. Moreover, the average loan size of the top four banks is even lower than the overall PPP program average of $113,000 reported by the SBA. Overall, Forum members have made over 755,000 small business loans for a total of $69.9 billion. This activity is substantial to the PPP program and is helping small businesses across the U.S.
The research paper also directly compares PPP activity to regular small business lending activity and argues that PPP lending of the top four banks is small by comparison. This comparison is inappropriate because the PPP program is a government relief program and can’t be meaningfully compared with traditional business lending. Consider the fact that PPP loans are not underwritten in the usual sense, but are the result of a government guaranteed program. Also consider that, according to OCC data, in 2019 the entire banking system made roughly seven million small business loans. Over the months of April and May 2020, the PPP program made roughly 4.5 million loans, which would put it on an annual pace to make roughly 27 million loans. Clearly such different activities can’t be meaningfully compared with each other.
A better comparison can be made between the existing SBA 7a program and the PPP program. Indeed, the PPP program is an extension of the SBA 7a program, which is also a government guaranteed loan program. The middle columns in Table 1 report the share of total SBA 7a activity in fiscal year 2019 accounted for by the top four banks. Comparing PPP shares and SBA 7a shares clearly shows that these banks have participated even more actively in the PPP program when looking at both the share of dollar lending and share of loans made. This result reflects the significant resources and commitment large banks have made to the PPP program to ensure its success and support for the economy during this difficult pandemic period.
What Role Do Banks Play in Targeting the PPP Program?
Finally, the paper spends a lot of time arguing that the PPP program has not been well targeted to the areas hardest hit by the pandemic. The design of the PPP program and its success in effectively dealing with the economic fallout from the pandemic is clearly an important public policy issue worthy of study. At the same time, it is important to note that the design of the PPP program is governed by legislation and not banks. Rather, banks have energetically played a supporting role in executing a government-designed relief program. In particular, banks have no authority to make PPP funding decisions based on the severity of the COVID-19 pandemic in any particular geographic area or industry. Any small business that meets the program’s broad eligibility criteria can obtain a loan. Accordingly, the degree to which the PPP program targets severely affected areas is a feature of the government’s program design and not actions taken by banks.
Recent data show that large banks, and Forum members in particular, have made a substantial contribution to the PPP program. Activity measures based on data from April are outdated and should not be relied upon to assess the participation of large banks in the PPP program. When compared with a reasonable comparison group, SBA 7a lending, the data show that large banks are stepping up their activity and participation in the PPP program. Forum members have made over 755,000 PPP loans to small businesses worth nearly $70 billion. These amounts are substantial and are helping small businesses and communities across America deal with the challenges of the ongoing pandemic.