When banks got done making their first batch of loans under the Paycheck Protection Program, the results looked like a quiet “red state bailout,” as the Atlantic’s David Frum put it. The quickly depleted funds had disproportionately aided smaller, more rural states in the middle of the country that just happened to have voted for Donald Trump in 2016—to the relative neglect of blue states that had been hit harder by the coronavirus pandemic.
PPP’s second stage, however, is shaping up differently. As the Economic Innovation Group points out in a new analysis, large coastal states that were shortchanged during the first wave of lending are pulling in a much larger share of the money this time. During the first go, businesses in California received just 9.8 percent of all dollars. During the second, they’ve gotten 19.1 percent. New York went from 5.9 percent to 10 percent of the program, while New Jersey jumped from 2.8 percent to 4.3.
For easy comparison, here are the top 10 states from round one:
And here they are for round two:
So why is blue America doing better this time around?
We don’t know for sure. But the best answer I can offer has to do with the way different kinds of financial institutions have navigated the Paycheck Protection Program, which, as everyone knows at this point, started off as a bureaucratic mess. The difference could offer an important lesson for the next time we want to create an emergency lending program in the middle of an economy-crushing pandemic.
In round one, the vast majority of loans seem to have been made by midsize and community banks, which benefited the small, rural, and red states where they tend to have a stronger presence. That wasn’t a total surprise: Community banks have a lot of experience working with the Small Business Administration, which is running the Paycheck Protection Program, and as a result they seem to have been better at getting loans out the door quickly compared with the megabanks. An analysis last week by the Federal Reserve Bank of New York found that, generally speaking, states where community banks make up more of the market also tended to get more PPP money. That may have put businesses in large blue states like New York and California, where the likes of JPMorgan and Bank of America dominate, at a disadvantage.
Round two was different. As of last week, the 15 largest lenders had originated 45 percent of loans in the program, more than double their share of the first tranche. Basically, the megabanks have had a chance to catch up and process their remaining loans, which meant their clients on the coasts could finally get money. A big part of the reason why that may be is that loan demand has slowed down for various reasons; there’s now more than $120 billion still sitting in the program’s coffers, suggesting that pretty much everybody who wants a loan has now gotten one. A less charitable reading is that large banks might have spent more energy in round one making sure their VIP clients got loans and only turned their attention to mom and pop shops in round two. (Their average loan size went way down.) Either way, they got to make more loans this time around, and that probably benefited the likes of New York and California, as well as larger red states like Florida.
All of this suggests that running a government program through private banks can have serious geographic consequences for where the money actually ends up, depending on which kinds of financial institutions are best poised to take advantage of them. Community banks are wonderful. But it’s not entirely clear that they’re the best vehicles to get money to places where businesses usually rely on faceless corporate behemoths for lending, like New York.