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Applications or Approvals: What Drives Racial Disparities in the Paycheck Protection Program?

Author

Listed:
  • Sergey V. Chernenko
  • Nathan Kaplan
  • Asani Sarkar
  • David Scharfstein

Abstract

We use the 2020 Small Business Credit Survey to study the sources of racial disparities in use of the Paycheck Protection Program (PPP). Black-owned firms are 8.9 percentage points less likely than observably similar white-owned firms to receive PPP loans. About 55 percent of this take-up disparity is attributable to a disparity in application propensity, while the remainder is attributable to a disparity in approval rates. The finding in prior research that Black-owned PPP recipients are less likely than white-owned recipients to borrow from banks and more likely to borrow from fintech lenders is driven entirely by application behavior. Conditional on applying for a PPP loan, Black-owned firms are 9.9 percentage points less likely than white-owned firms to apply to banks and 7.8 percentage points more likely to apply to fintechs. However, they face similar average approval disparities at banks (7.4 percentage points) and fintechs (8.4 percentage points). Sorting by Black-owned firms away from banks and towards fintechs is significantly stronger in more racially biased counties, and the bank approval disparity is also larger in more racially biased counties. We conclude that insofar as automation by fintechs reduces racial disparities in PPP take-up, it does so by mitigating disparities in loan application rates, not loan approval rates.

Suggested Citation

  • Sergey V. Chernenko & Nathan Kaplan & Asani Sarkar & David Scharfstein, 2023. "Applications or Approvals: What Drives Racial Disparities in the Paycheck Protection Program?," Staff Reports 1060, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:96161
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    References listed on IDEAS

    as
    1. Humphries, John Eric & Neilson, Christopher A. & Ulyssea, Gabriel, 2020. "Information frictions and access to the Paycheck Protection Program," Journal of Public Economics, Elsevier, vol. 190(C).
    2. Erel, Isil & Liebersohn, Jack, 2022. "Can FinTech reduce disparities in access to finance? Evidence from the Paycheck Protection Program," Journal of Financial Economics, Elsevier, vol. 146(1), pages 90-118.
    3. Brett Barkley & Mark E. Schweitzer, 2022. "Credit Availability for Minority Business Owners in an Evolving Credit Environment: Before and During the COVID-19 Pandemic," Working Papers 22-18, Federal Reserve Bank of Cleveland.
    4. Sergey Chernenko & David S. Scharfstein, 2022. "Racial Disparities in the Paycheck Protection Program," NBER Working Papers 29748, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Matteo Crosignani & Hanh Le, 2023. "Stakeholders’ Aversion to Inequality and Bank Lending to Minorities," Staff Reports 1079, Federal Reserve Bank of New York.

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    More about this item

    Keywords

    discrimination; racial disparities; Paycheck Protection Program (PPP); bank lending; FinTech Lending; administrative burden;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • 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

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