Emergency loans for small businesses “disbursed in areas less hard hit” by coronavirus, study finds


A new loan program for small businesses affected by the coronavirus crisis has particularly helped parts of the country not to suffer as much from the pandemic, according to a National Bureau of Economic Research article published this week.

“We find no evidence that funds have flowed to areas that have been hit hardest by the economic effects of the pandemic, as measured by declines in hours worked or business closures,” researchers from the University of Chicago and Massachusetts Institute of Technology. written in the diary on the Paycheque Protection Program.

“If anything, we find suggestive evidence that funds have flowed to less hard-hit areas. “

Researchers found that 15% of establishments in regions most affected by declining hours worked and business closures received PPP funding, while 30% of establishments received PPP money in less affected regions. .

This could be “the result of pre-existing banking relationships between counties, rather than an implementation issue,” as a major factor was that banks show considerable variation in their participation in the program as lenders, said Researchers. While the big banks have, in most cases, issued more loans than expected given their share of the small business market, the very large banks have significantly underperformed on PPP lending.

JPMorgan Chase JPM,
+ 2.42%
, Bank of America BAC,
+ 2.66%
, Wells Fargo WFC,
and Citibank C,
+ 1.52%
In the past, they accounted for 36% of loans to small businesses, but they disbursed less than 3% of all PPP loans, and these banks were “disproportionately located in areas that received less PPP funding,” the academics said.

In a separate analysis earlier this month, Evercore ISI economist Ernie Tedeschi said coastal blue states may lag behind red states in securing PPP loans in part because of ” closer community banking relationships ”in states like Nebraska.

Researchers at UCicago and MIT also attributed their findings to the fact that “PPP support is more generous for companies that maintain their payroll,” so “the program has likely attracted more companies with smaller cuts in payroll. their activity ”. PPP loans are repayable if companies use the proceeds primarily to retain employees, according to Treasury Department Directives.

“The evidence suggests that the PPP has functioned less like social insurance to support the hardest hit areas and more like cash support for less affected businesses,” the academics said.

The PPP sparked a series of criticisms, with small businesses and their bankers reporting widespread problems getting loans over the past month, including delays this week when the program reopens.

Meanwhile, more than 100 state-owned companies have revealed they have secured the aid, though many are returning the money after an outcry and a May 7 deadline from the Treasury Department for returns.

Democratic Representative Jackie Speier of California said earlier this month she smelled “a rat” and thought it was “political” as she noted how far the blue coastal states lagged behind the red states in obtaining PPP loans.

House Speaker Nancy Pelosi, also a California Democrat, suggested on Monday that banks that provide PPP loans should not be paid more to serve large corporations. The big banks are facing prosecution who claim to prioritize large borrowers, and some advocates say minorities and women business owners are excluded of the loan program.

The Trump administration has responded to some criticism, with Treasury Secretary Steven Mnuchin saying on Monday that PPP loans over $ 2 million would be audited.

The NBER paper, released on Sunday, is titled “Has Paycheck Protection Program Hit Target?” Its authors said they studied data on the distribution of PPP loans during the first cycle of the program as well as “high-frequency micro-level employment data”.

The PPP quickly surpassed the $ 350 billion it had initially received under the Cares Act of $ 2.2 trillion last month, then on Friday by an additional $ 320 billion when Trump enacted the program. $ 484 billion paycheck protection and the Better Health Care Act.

US DJIA equities,
+ 0.21%

are trading well below their February highs due to coronavirus-related lockdowns on trading activity, but they have recovered from their late March lows thanks in part to optimism surrounding aid programs from Washington. The S&P 500 and the Dow Jones closed lower on Tuesday.

This report was first published on April 28, 2020.

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