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Who Supplies PPP Loans (And Does it Matter)? Banks, Relationships and the COVID Crisis

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  • Lei Li
  • Philip Strahan

Abstract

We analyze bank supply of credit under the Paycheck Protection Program (PPP). The literature emphasizes relationships as a means to improve lender information, which helps banks manage credit risk. Despite imposing no risk, however, PPP supply reflects traditional measures of relationship lending: decreasing in bank size; increasing in prior experience, in commitment lending, and in core deposits. Our results suggest a new benefit of bank relationships, as they help firms access government-subsidized lending. Consistent with this benefit, we show that bank PPP supply, based on the structure of the local banking sector, alleviates increases in unemployment.

Suggested Citation

  • Lei Li & Philip Strahan, 2020. "Who Supplies PPP Loans (And Does it Matter)? Banks, Relationships and the COVID Crisis," NBER Working Papers 28286, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:28286
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    References listed on IDEAS

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    1. Hans Degryse & Steven Ongena, 2005. "Distance, Lending Relationships, and Competition," Journal of Finance, American Finance Association, vol. 60(1), pages 231-266, February.
    2. Patrick Bolton & Xavier Freixas & Leonardo Gambacorta & Paolo Emilio Mistrulli, 2016. "Relationship and Transaction Lending in a Crisis," Review of Financial Studies, Society for Financial Studies, vol. 29(10), pages 2643-2676.
    3. Berger, Allen N. & Miller, Nathan H. & Petersen, Mitchell A. & Rajan, Raghuram G. & Stein, Jeremy C., 2005. "Does function follow organizational form? Evidence from the lending practices of large and small banks," Journal of Financial Economics, Elsevier, vol. 76(2), pages 237-269, May.
    4. Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," The Journal of Business, University of Chicago Press, vol. 68(3), pages 351-381, July.
    5. Daniel L. Greenwald & John Krainer & Pascal Paul, 2020. "The Credit Line Channel," Working Paper Series 2020-26, Federal Reserve Bank of San Francisco.
    6. Tetyana Balyuk & Nagpurnanand R. Prabhala & Manju Puri, 2020. "Indirect Costs of Government Aid and Intermediary Supply Effects: Lessons From the Paycheck Protection Program," NBER Working Papers 28114, National Bureau of Economic Research, Inc.
    7. Gabriel Chodorow-Reich & Olivier Darmouni & Stephan Luck & Matthew C. Plosser, 2020. "Bank Liquidity Provision Across the Firm Size Distribution," NBER Working Papers 27945, National Bureau of Economic Research, Inc.
    8. João Granja & Christos Makridis & Constantine Yannelis & Eric Zwick, 2020. "Did the Paycheck Protection Program Hit the Target?," Working Papers 2020-52_Revised, Becker Friedman Institute for Research In Economics.
    9. 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).
    10. Jeremy C. Stein, 2002. "Information Production and Capital Allocation: Decentralized versus Hierarchical Firms," Journal of Finance, American Finance Association, vol. 57(5), pages 1891-1921, October.
    11. Petersen, Mitchell A & Rajan, Raghuram G, 1994. "The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
    12. Santiago Barraza & Martín Rossi & Timothy J. Yeager, 2020. "The Short-Term Effect of the Paycheck Protection Program on Unemployment," Working Papers 144, Universidad de San Andres, Departamento de Economia, revised Aug 2020.
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    Cited by:

    1. W. Blake Marsh & Padma Sharma, 2021. "Government Loan Guarantees during a Crisis: The Effect of the PPP on Bank Lending and Profitability," Research Working Paper RWP 21-03, Federal Reserve Bank of Kansas City.
    2. Acharya, Viral V. & Engle III, Robert F & Steffen, Sascha, 2021. "Why did bank stocks crash during COVID-19?," CEPR Discussion Papers 15901, C.E.P.R. Discussion Papers.
    3. Jose A. Lopez & Mark M. Spiegel, 2021. "Small Business Lending Under the PPP and PPPLF Programs," Working Paper Series 2021-10, Federal Reserve Bank of San Francisco.
    4. Sriya Anbil & Mark A. Carlson & Mary-Frances Styczynski, 2021. "The Effect of the PPPLF on PPP Lending by Commercial Banks," Finance and Economics Discussion Series 2021-030, Board of Governors of the Federal Reserve System (U.S.).
    5. Sabrina T. Howell & Theresa Kuchler & David Snitkof & Johannes Stroebel & Jun Wong, 2021. "Racial Disparities in Access to Small Business Credit: Evidence from the Paycheck Protection Program," CESifo Working Paper Series 9345, CESifo.

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    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services

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