Download Article

RWP 21-03, June 2021

We study bank responses to the Paycheck Protection Program (PPP) and its effects on lender balance sheets and profitability. To address the endogeneity between bank decisions and balance sheet effects, we develop a Bayesian joint model that examines the decision to participate, the intensity of participation, and ultimate balance sheet outcomes. Overall, lenders were driven by risk-aversion and funding capacity rather than profitability in their decision to participate and the intensity of their participation. Indeed, with greater participation intensity, banks experienced sizable growth in their loan portfolios but a decline in their interest margins. In counterfactual exercises, we show that the PPP offset a large potential contraction in business lending, and that bank margins would have fallen even more precipitously if lenders had not participated in the program. Although the PPP was intended as a credit support program for small firms, the program indirectly supported the margins of banks that channeled these loans.

JEL Classifications: C11, G21, G28, H12

Article Citation

  • Marsh, W. Blake, and Padma Sharma. 2021. “Government Loan Guarantees during a Crisis: The Effect of the PPP on Bank Lending and Profitability.” Federal Reserve Bank of Kansas City, Research Working Paper no. 21-03, June. Available at External Linkhttps://doi.org/10.18651/RWP2021-03

Authors

W. Blake Marsh

Senior Economist

Blake Marsh is a senior economist at the Federal Reserve Bank of Kansas City. He joined the Banking Research department in July 2016. His research areas are commercial bank regul…

Padma Sharma

Economist

Padma Sharma is an Economist at the Federal Reserve Bank of Kansas City. She joined the Economic Research Department in July 2019. Prior to joining the department, she completed …