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Racial Disparities in Access to Small Business Credit: Evidence from the Paycheck Protection Program

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  • Ströbel, Johannes
  • Howell, Sabrina
  • Kuchler, Theresa
  • Snitkof, David

Abstract

We explore the sources of racial disparities in small business lending by studying the $806 billion Paycheck Protection Program (PPP), which was designed to support small business jobs during the COVID-19 pandemic. PPP loans were administered by private lenders but federally guaranteed, largely eliminating unobservable credit risk as a factor in explaining differential lending by race. We document that even after controlling for a firm's zip code, industry, loan size, PPP approval date, and other characteristics, Black-owned businesses were 12.1 percentage points (70% of the mean) more likely to obtain their PPP loan from a fintech lender than a traditional bank. Among conventional lenders, smaller banks were much less likely to lend to Black-owned firms, while the Top-4 banks exhibited little to no disparity after including controls. We use novel data to show that the disparity is not primarily explained by differences in pre-existing bank or credit relationships, firm financial positions, fintech affinity, or borrower application behavior. In contrast, we document that Black-owned businesses' higher rate of borrowing from fintechs compared to smaller banks is particularly large in places with high racial animus, pointing to a potential role for discrimination in explaining some of the racial disparities in small business lending. We find evidence that when small banks automate their lending processes, and thus reduce human involvement in the loan origination process, their rate of PPP lending to Black-owned businesses increases, with larger effects in places with more racial animus.

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  • Ströbel, Johannes & Howell, Sabrina & Kuchler, Theresa & Snitkof, David, 2021. "Racial Disparities in Access to Small Business Credit: Evidence from the Paycheck Protection Program," CEPR Discussion Papers 16623, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:16623
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    Cited by:

    1. Nam, Rachel J., 2022. "Open banking and customer data sharing: Implications for FinTech borrowers," SAFE Working Paper Series 364, Leibniz Institute for Financial Research SAFE.
    2. Robert Fairlie & Frank M. Fossen, 2022. "The 2021 Paycheck Protection Program Reboot: Loan Disbursement to Employer and Nonemployer Businesses in Minority Communities," AEA Papers and Proceedings, American Economic Association, vol. 112, pages 287-291, May.
    3. Sergey Chernenko & David S. Scharfstein, 2022. "Racial Disparities in the Paycheck Protection Program," NBER Working Papers 29748, National Bureau of Economic Research, Inc.
    4. Hasan, Iftekhar & Krause, Thomas & Manfredonia, Stefano & Noth, Felix, 2022. "Banking market deregulation and mortality inequality," Bank of Finland Research Discussion Papers 14/2022, Bank of Finland.

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    More about this item

    Keywords

    Ppp; Fintech; Discrimination;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • J15 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Minorities, Races, Indigenous Peoples, and Immigrants; Non-labor Discrimination

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