Who gets the money?

Matt Levine’s “Money Stuff” column (23 April 2020) has some interesting observations commenting on which bank customers received the money the U.S. government made available under its Paycheck Protection Program. The column’s headline focus is developments in the oil market, which is worth reading in its own right, but the bank commentary is further down under the subheading “PPP”.

You can find the column here but there are a couple of extracts below that give you the basic thrust of his comments …

The U.S. government is distributing free money to small businesses so that they can stay afloat, and keep paying workers, during the coronavirus shutdown. It is doing this through the Paycheck Protection Program, in which banks lend the money to small businesses, and then the government (the U.S. Small Business Administration) pays back the loans if the businesses use the money for payroll. This is, broadly speaking, sensible. I once wrote about it:

It is a public-private partnership that plays to each side’s strengths. Banks are, precisely, in the business of vetting applications from local restaurants, examining their financial records and deciding how much money they need. The government, meanwhile, is best equipped to generate magical quantities of money. The banks do something recognizably bank-like—market and underwrite small-business loans—and the government transforms them into magical free money.

Matt Levine, Bloomberg “Money Stuff” column, 23 April 2020

Matt goes on to offer his perspective on the strengths of the program, some of the practical issues of execution but also its potential unintended outcomes

That’s the idea. But if you are enlisting banks to run your program, you are going to get … banks. Like, the banks are going to behave in recognizably bank-like ways while they are doing the bank-like job of handing out the loans. Some of that will be good: You want the banks to check that the small businesses exist and aren’t stealing the money and so forth. Some of it will be good-ish, or debatable: You want the banks to check that the documents are all in order and that the loans match the businesses’ actual financial needs, but you don’t want them to spend so much time checking that the businesses never get their money.

And some of it will be … not exactly bad, necessarily, but at least unrelated to the goals of the program.

I don’t have any insight on whether these big American banks are guilty as charged, or indeed guilty at all. Matt is I think open minded and simply presenting the facts but it is something worth watching as the COVID 19 crisis plays out. As a general observation, I feel like the Australian banks have for the most part made extra (if not extraordinary) efforts to do the right thing by both their customers and the community at large. I am of course a (now semi retired) banker so that colours my observation but, as an ongoing bank shareholder, I expect to be feeling some of the impact of the forbearance in upcoming dividend payments and see that as part of the price of investing in banks.

Tony (From the Outside)

Author: From the Outside

After working in the Australian banking system for close to four decades, I am taking some time out to write and reflect on what I have learned. My primary area of expertise is bank capital management but this blog aims to offer a bank insider's outside perspective on banking, capital, economics, finance and risk.

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