The 2020 Paycheck Protection Program (PPP), which aimed to compensate people and businesses for economic losses stemming from measures to stop the spread of COVID-19, took advantage of existing private banking infrastructure rather than operating via direct applications to the government. Soomi Lee looks at how the concentration of regional banking markets affected PPP loans, finding that while more concentrated banking markets were linked to fewer loans, the presence of community banks in those markets mitigated this effect.

The US Congress passed the Paycheck Protection Program (PPP) in March 2020 as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in response to the COVID-19 pandemic. Its purpose is to help businesses compensate for revenue losses caused by stay-at-home orders and to preserve employment during the pandemic. Experts consider the program to be “the most ambitious and creative fiscal policy response to the Pandemic Recession.” The PPP loan sum is pre-determined based on the business’s pre-pandemic operational expenses and carries a fixed interest rate of one percent. No collateral, personal guarantee, or credit score requirements are needed. PPP loans are conditionally forgivable and serve as conditional federal grants. Most remarkable is the speed of the disbursement. The initial $350 billion allocated in the first round was used up in less than two weeks. According to the Small Business Administration (SBA), over 11.8 million loans were approved and nearly $800 billion were distributed in total.

Local banks were key to the Paycheck Protection Program

One of the most creative features of PPP is that the federal government used existing private banking infrastructure to quickly distribute the funds. While other government disaster relief programs require a direct loan application through SBA, business owners submitted PPP applications to private banks. By processing PPP loans, banks received fees from the SBA.

Banks, therefore, were the primary vehicle for implementing PPP. Banking infrastructure, however, differs across US regions. Some regional banking markets are highly concentrated, while other markets are relatively competitive. In addition, in some markets, community banks play a significant role, while in other regions, national banks dominate the market. It implies that the program outcomes of PPP may have been impacted by banking market characteristics across regions.

Photo by Joshua Hoehne on Unsplash

Figure 1 shows a large variation in the number of distributed PPP loans in US counties. The map displays a pattern where the darker color represents a higher number of PPP loans per 100 businesses in a county. Clearly, the geographic distribution of PPP loans was uneven and that counties in the Midwest received more loans compared to other regions. In recent research, I investigated how regional banking market characteristics impacted the dispersion of PPP loans since the banking sector facilitated the distribution of the loans.

Figure 1 – Number of Approved PPP Loans per 100 Businesses in US Counties

The finance literature points out two major characteristics of the regional banking sector—market concentration and the presence of community banks, and therefore they are the key variables that explain the variations in PPP distribution I found.

Figure 2 shows varying degrees of banking market concentration in US counties. According to the Federal Deposit Insurance Corporation, the number of commercial banks has decreased by 68 percent from 1986 to 2019 and domestic assets have been concentrated in a dozen national banks. Experts and decision-makers have expressed worry about the potentially harmful effects of significant market concentration in the banking industry on lending to small businesses. Their concern is that a lack of competition among banks could lead to a decrease in lending to small businesses. As a result, I took regional banking market structure into account as a key factor when determining the distribution of PPP loans, expecting that greater regional banking market concentration leads to fewer PPP loan distribution.

Figure 2 – Market Concentration in US Counties

Source: FDIC. Author’s own computation

However, market concentration is not the only main feature describing regional banking market. Recent studies have shown that the types of banks, whether they are national or community banks, are important in determining lending outcomes to small businesses, in addition to market concentration. Different regions have different levels of community bank presence as Figure 3 shows. Community banks have greater presence in the Midwest and New England counties. The pattern in Figure 3 is strikingly similar to the pattern of geographic distribution of PPP loans in Figure 1.

Figure 3 – Presence of Community Banks Ratio of community bank branches to all bank branches

Source: FDIC. Author’s own computation.

Studies show that community banks have a deep understanding of the local economy and small businesses, which often lack externally audited financial statements that big banks require. They use this “soft information” to supplement the “opaque” financial conditions of small businesses, and thus, they are more likely to create a favorable environment for small businesses. Nonetheless, finance scholars have shown that the lending behavior of community banks depends on the market environment. For instance, community banks may favor small businesses in a competitive market, while they may pick and choose their clients if they are in a position of power. Thus, my paper looks at how market structure and the presence of community banks interacted and determined the distribution of PPP loans.

Figure 4 summarizes what my analysis found. The downward slopes indicate that greater regional banking market concentration is linked to there being fewer PPP loans. However, this negative effect is mitigated by the presence of community banks. That is, the negative effect becomes larger in counties with a weaker presence of community banks, whereas it becomes weaker in counties with a strong presence of community banks. This mitigating effect of the presence of community banks is especially pronounced in a highly concentrated market. 

Figure 4 – Interaction Effects of Banking Market Concentration and Presence of Community Banks on PPP Loan Distribution

More than three-fourths of the county-level financial markets in the US are heavily concentrated, and this trend is unlikely to change. In such markets, community banks played a critical role for small businesses in processing PPP loans during the COVID-19 pandemic. My research shows that it is imperative to be aware of how federal policies are carried out during an economic crisis to achieve fair outcomes in all regions when using private banking infrastructure.

• This article is based on the paper, ‘Banking infrastructure and the Paycheck Protection Program during the Covid-19 pandemic’ in Regional Studies.
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