When the government first started releasing detailed data about the Paycheck Protection Program a couple weeks back, it quickly became clear that the states hit hardest by the coronavirus were not necessarily the ones benefiting most from the small-business rescue effort. Businesses in New York, for instance, were getting less help than ones in Alabama, Arkansas, Nebraska, or Texas. The program also seemed to favor states with a tendency to vote Republican. Neither fact seemed to have have a satisfying, immediate explanation, unless you wanted to sound like a conspiracy nut. (No, this isn’t a repeat of the White House’s curiously red-leaning distribution of medical equipment.)
This week, however, researchers at the Federal Reserve Bank of New York may have finally found one. Their analysis, published Wednesday, suggests that businesses were more likely to get loans in states with stronger community banking sectors, because small and medium financial institutions have quietly dominated the program. Those states have not necessarily had the most COVID-19 cases. They do, however, tend to be more rural and red.
First, the graph that should concern everybody. There is essentially zero relationship between the share of businesses that received paycheck protection loans in a state and the severity of its coronavirus outbreak. In fact, New York and New Jersey, the epicenters of the pandemic, are near the bottom in terms of benefits.
So, who did get money? For the most part, middle America. (I mean that in a literal geographic sense, not a cultural one.) With the except of upper New England, the 25 states where more than a third of small businesses received PPP loans ranged from the Midwest to the Mountain West. Of those, 19 voted for Donald Trump in 2016.
The Fed researchers identified two key patterns that could explain this. First, it seemed to help when businesses already had some sort of lending relationship in place—in states where a larger share of businesses got bank financing in 2019, a larger share tended to get paycheck protection loans. This isn’t too surprising, since many banks that participated in the program chose to only offer loans to established clients, in part because it was easier to deal with regulations that way, and because they wanted to keep regular customers happy.
Second, community banks seemed to play a key role. Businesses were much more likely to get paycheck protection loans in states where these smaller financial institutions had a stronger presence.
But why the connection? Simple. Small- and medium-sized banks have quietly dominated this program, in part because they’re already used to making loans guaranteed by the Small Business Administration, and also because they may see it as a larger opportunity. The researchers write:
Community banks have been reported to view PPP as a chance to expand their customer base. The four largest banks in the United States represent a significant share of the depository base but have (at most) a combined 12 percent share of the total amount lent through the PPP. Moreover, the fifteen largest banks originating PPP loans have just a combined 26 percent market share of the total dollar amount lent. It seems therefore that medium-sized and small banks, including community banks, are important in channeling PPP funding.
There has been a lot of controversy in recent weeks over the fact that some largish, public companies were able to receive paycheck protection loans, and the possibility that large banks might have been prioritizing the needs of bigger businesses over those of smaller ones. But the New York Fed’s research suggests that the real problem with the program isn’t that big businesses and banks dominated it. In fact, it seems to have suffered from almost the opposite issue—the lending has been driven by small and midsize banks that simply aren’t a force in the states where the outbreak and its economic toll are worst. Because lenders have avoided working with new clients, channeling the program through community banks likely hasn’t done much to help minority- and immigrant-owned businesses in places like New York and California that operate on cash rather than credit.
Now, none of this would be as much of an issue if Congress simply uncapped the funding on this program, so any business that wanted a loan could eventually get one. That would have made the most sense at this point, given that businesses all over the country need aid right now. But unfortunately, the money has been limited. And PPP’s design seems to have channeled help to some of the places that needed it the least.