Regional Banking Market Structure and Emergency Loans to Small Businesses: Examining the Paycheck Protection Program during the COVID-19 Pandemic

Abstract

I examine the effects of banking market structure on small business emergency lending to respond to an economic crisis. In particular, I focus on the role of banking market concentration and the presence of community banks in contributing to the number of loans made to small businesses through the Paycheck Protection Program (PPP) during the COVID-19-induced economic shock. Existing theories expect that small business credit access is reduced by higher banking market concentration and increased by community banks. I also explore how these two market characteristics interplay in regional small business credit markets. Using the U.S. county-level data, I find that greater banking market concentration reduces the number of PPP loans per business, but the negative effect is diminished by a greater presence of community banks. Furthermore, the greater presence of community banks increases the number of PPP loans but only in a highly concentrated credit market.

Keywords: small business loans, small business lending, banking market structure, regional financial market, access to credit, relationship lending, community banks, economic resilience, COVID-19, paycheck protection program, CARES Act

JEL Classification: G21, H8