Discrimination in Lending? Evidence from the Paycheck Protection Program

The Paycheck Protection Program was a highly unusual policy measure enacted to provide bridge capital to support small businesses coping with the dramatic downturn in demand due to the COVID-19 pandemic. By design, the program effectively required potential applicants to work through the bank with whom they had a relationship. Yet large swathes of the country are effectively banking deserts, which dramatically steepen the gradient for those regions’ businesses seeking Paycheck Protection Program support. This paper tests the proposition that the exogenous distribution of banks effectively discriminated against those regions where banking services were limited, while also looking at whether loans were distributed to those areas with less dense employment opportunities and higher concentrations of small businesses. The authors find that areas with fewer banking services and lower employment opportunities were systematically disadvantaged in the Paycheck Protection Program distribution, while there were no significant flows to areas with higher rates of small businesses.

Section: First Round Of Pppsupporting

confidence: 78%

Banking Deserts and the Paycheck Protection Program

Deming

Weiler

2023

“…The execution of the PPP program illustrates the ongoing inequality in access to capital by race and geography and has been criticized for providing unequal access to loans for small and minority-owned businesses and in predominantly minority communities. Atkins et al (2021) examined how the design of the PPP program, relying on existing SBA-approved financial institutions to distribute loans, resulted in Black-owned firms receiving smaller and fewer loans than comparable White-owned firms. They found that loan size differences between Black- and White-owned firms were slightly smaller in areas with greater financial competition (i.e., more bank branches).…”

Section: Literature Reviewmentioning

confidence: 99%

The Racial and Spatial Impacts of the Paycheck Protection Program

Lester

Wilson²

2023

The Paycheck Protection Program (PPP), with spending of nearly $800 billion, was the largest component in the United States’ economic response to the COVID-19 pandemic. The intention of the program was to provide emergency economic relief to small businesses and help them keep employees on their payroll. Critics of the PPP program feared that its reliance on private lending institutions would exacerbate racial and spatial injustice by mirroring existing inequalities in access to capital by race and across space. The authors compare PPP to existing residential and small business lending patterns, and test whether Black and Latinx neighborhoods were disadvantaged in receiving PPP loans. The authors find that majority Black and Latinx neighborhoods received disproportionately fewer PPP loans than majority White and Asian neighborhoods, but that policy changes during the third phase of the PPP resulted in better targeting of lending to lower-income areas, minority borrowers, and smaller businesses.

“…Racial and ethnic minorities are impacted by financial constraints (e.g., Bhutta et al, 2021; Munnell et al, 1996). These issues may be exacerbated by taste-based or statistical discrimination (e.g., Atkins et al, 2022; Bartlett et al, 2022; Begley & Purnanandam, 2021). This article focuses on the issue of whether banks discriminate in their choice of branch location.…”

Section: Banking Deserts—causes and Effectsmentioning

confidence: 99%

Banking for the Other Half: The Factors That Explain Banking Desert Formation

Langford,

Thomas,

Feldman

2023

Banks are one of the key drivers of economic development across communities. Banking deserts—defined by inadequate banking access—limit access to capital, inhibit wealth accumulation, and increase exposure to predatory lending. Banking desert formation could be profit-driven, with lower-income and less densely populated regions more likely to become banking deserts. Discrimination could also play a role here: banks may have less presence in areas with higher minority populations. The authors use a panel, census tract-level data set for the entire state of North Carolina to investigate how these forces impact banking access and banking desert formation. Panel methodologies are incorporated to investigate the extent to which profit and discrimination mechanisms each drive banking access and banking desert formation. Profit and discrimination mechanisms are shown to play roles, highlighting the need for policies that mitigate bank branch losses in underserved neighborhoods.