Regional banking market structure and emergency loans to small businesses: Examining the Paycheck Protection Program during the Covid-19 Pandemic

1. Soomi Lee
University of La Verne
Western Economic Association International Virtual Meeting
March 17, 2021
Regional Banking Market Structure and Emergency Loans to
Small Businesses: Examining the Paycheck Protection
Program during the Covid-19 Pandemic

2. Goal
• Examine the effect of regional banking market structure on
emergency lending to small businesses during an economic crisis.
• Analyze county-level data for the Paycheck Protection Program
(PPP), designed to ease the negative economic impact driven by
Covid-19 in 2020.
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3. Motivation
• Regional economic resilience and the role of financial intermediaries
(Martin and Sunley 2020)
• Q: what are the characteristics (initial conditions) of regional
financial markets that promote economic resilience?
• Disruption: shocks to regional economies
• Global, endogenous shocks: financial crisis
• Local, exogenous shocks: natural disasters
• Global, exogenous shock: Covid-19 pandemic
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4. 1. Market concentration in the banking sector
• Decline in # commercial banks: 68% decline between 1986 and
2019 (FDIC)
• Asset concentration: 12 largest banks hold 60 percent of all
domestic assets in 2020 (The Fed 2020)
• Asset size of all non-community banks was 82 times larger than that
of all community banks in 2019 (FDIC 2020)
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5. 1. Market concentration in the banking sector (cont’d)
1. Traditional view
Market concentration ⇡, small businesses lending ⇣
(Berger et al. 2004; Cetorelli and Strahan 2004)
2. “Investment theory”
Market concentration ⇡, small businesses lending ⇡
(Francis, Hasan, and Wang 2008)
3. Recent development
Nonlinear relationship; Considers types and sizes of banks and
borrowers (Strahan 2008)
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6. 2. Community banks and relationship lending
• Community banks – Definition
• Small banks, local banks
• FDIC definition: asset size, geographic footprint, specialty,
foreign assets, etc.
• Acquire deposits locally and make loans to local businesses, playing
a vital role in local economies (Rogers 2012).
• Community banks ⇡, small business lending ⇡.
• Mechanism: relationship lending using ”soft information”
• C.f., transaction lending using “hard information”
• In favor of young firms
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7. 3. Market concentration and relationship lending
• Dynamics of competition is determined by types of banks in the
market (Presbutero and Zazzaro 2011; Elsas 2005; Canales and
Nanda 2012)
• Effects of Bank M&As on SME lending depends on players (Peek
and Rosengren 1998; Strahan and Weston 1998; and Avery and
Samolyk 2004)
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8. 4. SME lending during economic crises
• Theory (Bolton et al. 2013): relationship borrowers pay higher
interest rates during normal times in anticipation of prolonged
relationships with banks during crises.
• Relationship borrowers are better at mitigating credit restrictions
during a recession (Sette and Gobbi 2014)
• PPP study (Amiram and Rabetti 2020): relationship borrowers get a
larger loan with a faster approval.
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9. Paycheck Protection Program
• Approved by Congress and implemented by the Small Business
Administration on March 27, 2020
• For SMEs with less than 500 employees & other small organizations
• Help small businesses with payroll, rent, etc.
• Fixed interest rate at 1%
• No collateral
• Potentially forgiven
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10. Data & Empirical Model
• Cross-sectional data with 1,300 U.S. Counties.
• Using Quantile Regression
• Instead of OLS, I use the Least Absolute Deviation model (baseline, q=0.5).
• Simply put, estimate the median conditional function instead of the mean
conditional function.
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!! = #! + %"#(''(!) + %$#(*+,-./0!) + %%#(''(!)(*+,-./0!) + 1!
&
2# + ∑ 4'
("
')" + 5!,
𝑦! = number of PPP loans per 100 businesses in county i
HHI = market concentration index
Cbratio = community bank branch ratio
𝑎! = intercept, 𝑥! =control variables, ∑ 𝑆=state fixed effects, 𝑒!=error term
Marginal effect of HHI = 𝛽"+ 𝛽# 𝐶𝐵𝑟𝑎𝑡𝑖𝑜
Marginal effect of CBratio = 𝛽$ + 𝛽#(𝐻𝐻𝐼)

11. Variables
• Dependent variable: PPP loans per 100 businesses
• Key explanatory variables (log)
• Market concentration (HHI)
• Community bank (CBratio)
• # full-service bank branches per 1000 businesses
• Control variables (log)
• Per capita income
• Population
• Covid-19 confirmed cases
• % jobs in hospitality, goods-producing industries, and trade (separately)
• Metropolitan indicator
• State fixed effects
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12. Main Results
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OLS Estimates Quantile Regression Estimates
q=.1 q=.25 q=.5, LAD q=.75 q=.9
(1) (2) (3) (4) (5) (6) (7)
HHI
-1.217*** -3.810*** -2.461*** -2.388*** -2.038*** -2.542*** -3.477***
(.287) (.511) (.517) (.501) (.429) (.468) (.686)
CBratio
1.175 -17.751*** -5.953* -7.985*** -8.596*** -13.785*** -21.88***
(.714) (3.174) (3.110) (2.979) (2.690) (3.264) (5.336)
HHI X CBratio .
5.153*** 1.743** 2.410*** 2.749*** 4.175*** 6.248***
(.842) (.883) (.847) (.753) (.915) (1.507)
Bank Branches
per 100 biz.
1.165*** 1.204*** 1.096*** 1.076*** 1.112*** .989*** 1.163***
(.143) (.142) (.239) (.202) (.152) (.217) (.200)
State FE Yes Yes Yes Yes Yes Yes Yes
N 3100 3100 3100 3100 3100 3100 3100
Adj. R2
.547 .552
Notes: Standard errors in parentheses. * p<0.1, ** p<0.05, *** p<0.01.

13. Interaction: Concentration & Community Banks
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18
19
20
21
22
23
Linear
Prediction
Number
of
PPP
Loans
per
100
Business
1.8 2 2.2 2.4 2.6 2.8 3 3.2 3.4 3.6 3.8 4 4.2 4.4 4.6
Market Concentration of Banking Sector, HHI (log)
q=0.25 q=0.5 q=0.75
Community Bank Branch Ratio to All Branches

14. Average Marginal Effects of Market Concentration
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0.55
-3
-2
-1
0
1
Effects
of
Banking
Market
Concentration
Linear
Prediction
of
PPP
Loans
0 .2 .4 .6
Community Bank Branch Ratio (log)

15. Average Marginal Effects of Community Bank
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2.15 3.6
-10
-5
0
5
Effects
of
Community
Bank
Brach
Ratio
2 2.5 3 3.5 4 4.5
Banking Market Concentration (HHI, log)

16. • Market concentration reduces PPP loans, but the effect is
mitigated by a greater presence of community banks.
• Community banks significantly increase PPP loans in a highly
concentrated market.
• Multi-dimensional features of regional banking market
interplay in determining emergency loans to small businesses.
• Contributes to the literature on regional economic resilience
• Interpretations are limited to correlations.
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Conclusion

17. Thank you!
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18. Main Results – Full Table
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OLS Estimates Quantile Regression Estimates
q=.1 q=.25 q=.5, LAD q=.75 q=.9
(1) (2) (3) (4) (5) (6) (7)
Concentration, HHI
-1.217*** -3.810*** -2.461*** -2.388*** -2.038*** -2.542*** -3.477***
(0.287) (0.511) (0.517) (0.501) (0.429) (0.468) (0.686)
Community Bank
Ratio, CB
1.175 -17.751*** -5.953* -7.985*** -8.596*** -13.785*** -21.878***
(0.714) (3.174) (3.110) (2.979) (2.690) (3.264) (5.336)
HHI X CB .
5.153*** 1.743** 2.410*** 2.749*** 4.175*** 6.248***
(0.842) (0.883) (0.847) (0.753) (0.915) (1.507)
Bank Branches per
100 biz.
1.165*** 1.204*** 1.096*** 1.076*** 1.112*** 0.989*** 1.163***
(0.143) (0.142) (0.239) (0.202) (0.152) (0.217) (0.200)
Metropolitan
Indicator
-0.254 -0.332 -0.317 -0.413* -0.202 -0.360 0.427
(0.266) (0.265) (0.243) (0.225) (0.208) (0.259) (0.419)
Population
-1.044*** -1.143*** -0.072 -0.322** -0.583*** -0.973*** -1.376***
(0.144) (0.144) (0.162) (0.153) (0.144) (0.164) (0.210)
Covid-19 Cases Per
Capita
0.030 0.041 0.128 0.122 0.151* 0.140 0.090
(0.089) (0.089) (0.096) (0.091) (0.086) (0.108) (0.148)
Income Per Capita
7.851*** 7.308*** 2.815*** 4.650*** 5.937*** 7.153*** 6.701***
(0.553) (0.557) (0.549) (0.570) (0.632) (0.713) (1.090)
Jobs in Hospitality
-17.412*** -17.068*** 1.467 -2.023 -4.600* -10.247*** -16.732***
(2.531) (2.517) (2.562) (2.422) (2.519) (3.254) (3.692)
Jobs in Goods-
Producing
-4.478*** -3.876*** 0.495 -1.020 -2.041 -4.628** -5.741**
(1.323) (1.319) (1.336) (1.245) (1.360) (1.798) (2.392)
Jobs in Trade
7.114*** 7.194*** 6.300*** 7.689*** 6.445*** 3.655 0.255
(2.448) (2.434) (2.251) (2.307) (2.279) (3.528) (5.184)
State FE Yes Yes Yes Yes Yes Yes Yes
N 3100 3100 3100 3100 3100 3100 3100
Adj. R2
0.547 0.552
Notes: Standard errors in parentheses. * p<0.1, ** p<0.05, *** p<0.01.