States hardest hit by the COVID-19 pandemic received fewer loans on a per-business basis in the first round of the Paycheck Protection Program than states that have suffered the least from the virus, according to the Federal Reserve Bank of New York.
According to a new study from the New York Fed, which examined the $349 billion dispersed in the first round, less than 20% of the loan applications from small businesses in New York state, the epicenter of the pandemic in the U.S., were approved compared with 55% for small businesses in Nebraska. (Another $310 billion was approved for the second round.)
Some of the hardest hit areas — such as New York, New Jersey, Michigan and Pennsylvania — are getting fewer loans than some Mountain and Midwest states on a per-small business basis,” according to the report.
The report also found that small businesses in some of the industries suffering the biggest losses from the COVID-19 pandemic, such as retail and hotels and food services, received a smaller share of funds from PPP loans than businesses involved in construction and scientific and technical services.
The New York Fed researchers tested several hypotheses for the underlying reasons for these results, including the idea that states hit the hardest have had more strict lockdown policies, making it difficult for borrowers to obtain loans. But the report knocks down that idea because most of the PPP applications are done online, as well as other explanations.
What it does find is a link between loan approvals and small businesses’ banking relationships, which has been widely reported, but with a twist. It’s the relationship with community banks that’s key, according to the New York Fed report.
States with larger shares of community banks such as North Dakota, Nebraska, Wyoming and Iowa, as measured by the percentage of deposits in those banks, had a larger share of PPP loans. The percentage of deposits in community banks in those four states ranged between 35% and 50%.