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Did prudent risk management practices or weak customer demand reduce PPP lending by the largest banks?

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  • Kupiec, Paul H.

    (American Enterprise Institute, USA)

Abstract

Regulatory data shows large differences between large and small banks’ response to the Paycheck Protection Program (PPP). Large bank loan originations are smaller than predicted based on operational characteristics and historical lending patterns. One possible explanation is that large banks put greater emphasis on the legal and reputational risks associated with PPP loans because of their prior experience with similar government programmes. A second possibility is that there were systematic differences in large and small bank PPP loan demand. While bank-specific PPP loan demand is unobserved, indirect evidence is inconsistent with the customer demand explanation. On balance, circumstantial evidence favours the hypothesis that large banks took a more cautious approach to PPP lending to minimise the legal and reputational risks that have been endemic to past government loan guarantee programmes.

Suggested Citation

  • Kupiec, Paul H., 2021. "Did prudent risk management practices or weak customer demand reduce PPP lending by the largest banks?," Journal of Risk Management in Financial Institutions, Henry Stewart Publications, vol. 14(2), pages 148-160, March.
    • Handle: RePEc:aza:rmfi00:y:2021:v:14:i:2:p:148-160
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    More about this item

    Keywords

    Paycheck Protection Program; legal and reputational risks;

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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