Did prudent risk management practices or weak customer demand reduce PPP lending by the largest banks?
Abstract
Regulatory data shows large differences between large and small banks’ response to the Paycheck Protection Program (PPP). Large bank loan originations are smaller than predicted based on operational characteristics and historical lending patterns. One possible explanation is that large banks put greater emphasis on the legal and reputational risks associated with PPP loans because of their prior experience with similar government programmes. A second possibility is that there were systematic differences in large and small bank PPP loan demand. While bank-specific PPP loan demand is unobserved, indirect evidence is inconsistent with the customer demand explanation. On balance, circumstantial evidence favours the hypothesis that large banks took a more cautious approach to PPP lending to minimise the legal and reputational risks that have been endemic to past government loan guarantee programmes.
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Author's Biography
Paul H. Kupiec Paul Kupiec is a resident scholar at the American Enterprise Institute (AEI) specialising in the management and regulation of financial markets and institutions. Prior to the AEI, he held senior positions at the Federal Reserve Board, JPMorgan, FreddieMac, the International Monetary Fund, and the Federal Deposit Insurance Corporation. He served as Chairman of the Research Task Force of the Basel Committee on Banking Supervision and has testified multiple times before House and Senate financial committees.
Citation
Kupiec, Paul H. (2021, March 1). Did prudent risk management practices or weak customer demand reduce PPP lending by the largest banks?. In the Journal of Risk Management in Financial Institutions, Volume 14, Issue 2. https://doi.org/10.69554/GVAN7562.
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