- Study suggests that lenders participating in the Paycheck Protection Program were more likely to take on greater risks outside the program
- Low-risk, low-yield framework of the program may have spurred lenders to seek greater profits through other loan products
- Researchers also concluded that timelier loss recognition may constrain risk-taking incentives
Summary by Dirk Langeveld
Participation in the Paycheck Protection Program may have encouraged lenders to take on more risk in lending outside the program, according to a study set to be published in the journal Management Science.
Accounting professors at three universities scrutinized the effect of PPP participation and financial reporting standards on banks’ risk-taking behavior. The research suggests that the low-risk, low-yield framework of PPP may have encouraged lenders to take greater chances on other loan products to pursue higher profits.
The study also concluded that lenders that had not adopted a current expected credit loss model, as well as those with timelier pre-PPP loan loss provisions, were more likely to increase their risk-taking behavior. The researchers say this finding suggests that timelier loan loss recognition may constrain risk-taking incentives.
Over three separate funding rounds between April 2020 and May 2021, PPP disbursed nearly $800 billion through 11.82 million loans. A total of 5,467 lenders participated in the program.