The impact of the Paycheck Protection Program on the risk-taking behaviour of US banks

The economic impact of COVID-19 has placed many small businesses across the US in financial distress. In response to this, in March 2020 the US government introduced, as part of the CARES Act, the Paycheck Protection Program (PPP) intended to provide relief to small businesses and to preserve jobs during the COVID-19 pandemic. The latter resulted in three waves of funding distributed to small businesses through SBA approved lenders, mainly represented by US banks. Using a panel dataset of 4,610 banks over the period Q1 2019–Q4 2020 and by employing a difference-in-differences approach (DiD), in this paper I investigate whether participation in the Paycheck Protection Program has affected community banks’ credit risk-taking behaviour in the post-PPP period, in comparison to their larger banking counterparts in the US. I find that the Paycheck Protection Program has led community banks to decrease their risk appetite outside of the program, consistent with their greater exposure to the commercial real estate sector, heavily hit by the pandemic. My results are robust to a battery of robustness tests and identification strategies. I offer novel evidence on the indirect impact of the Paycheck Protection Program as a government-funded stimulus program administered through banks by investigating the effect of the Paycheck Protection Program on the credit risk-taking behaviour of community US banks that dominate lending of PPP loans as a result of their competitive advantage in soft information-intensive small business lending.