The Paycheck Protection Program Liquidity Facility, Desi Volker, Federal Reserve Bank of New York Economic Policy Review 28, no. 1

Summary

In this article from the Federal Reserve Bank of New York’s Economic Policy Review (28, no. 1, June 2022), financial economist Desi Volker examines the Paycheck Protection Program Liquidity Facility, which the Federal Reserve established in April 2020 to boost lender participation in the SBA’s Paycheck Protection Program. The PPP started with $349 billion in authorized funds and ran until May 31, 2021, by which date 11,823,594 loans had been approved for a total of nearly $800 billion. The article finds that smaller lenders, including community banks and nondepository institutions, relied more heavily on PPPLF financing, while national and regional banks financed about 20 percent of their PPP loans through it. It concludes that the facility helped bolster the PPP’s effectiveness by increasing lending to smaller businesses.

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The Paycheck Protection
Program Liquidity
Facility
Desi Volker

OVERVIEW
• The Federal Reserve
established the Paycheck
S tarting in early spring of 2020, the COVID-19 outbreak
caused unprecedented widespread disruptions to
economic activity that had a significant impact on businesses
Protection Program Liquidity
and state and local municipalities, as well as individuals.
Facility (PPPLF) in April 2020
to boost lender participation in
To mitigate some of these disruptions and provide relief to
the Small Business Adminis- entities affected by the economic fallout from the measures
tration’s Paycheck Protection to contain COVID-19, Congress signed the Coronavirus
Program (PPP), which offered Aid, Relief, and Economic Security Act (CARES Act)
small businesses forgivable into law on March 27, 2020. Among other provisions,
government-guaranteed
the CARES Act established funding for forgivable
loans to keep workers paid
and employed amid the government-guaranteed loans to small businesses under the
COVID-19 outbreak. Small Business Administration’s (SBA) Paycheck Protection
Program (PPP).1
• This article describes the
features and goals of the PPP The PPP was aimed at providing a lifeline to small busi-
and the PPPLF, and analyzes nesses to help them maintain payroll and keep workers paid
the facility’s loan take-up and and employed. Small businesses could apply for loans
its impact on lender participa- through an extended list of lenders, which included
tion in the PPP and PPP loan
then-current SBA-approved lenders and, over time, newly
disbursements.
approved lenders such as banks, credit unions, financial
• The findings suggest that by technology firms (fintechs), and online marketplaces. The
supplying liquidity to smaller
program went through several phases, characterized by new
lenders such as community
banks and fintechs, the PPPLF
batches of funding, deadline extensions, and refinement and
helped bolster the PPP’s clarification of rules and guidelines. The SBA reimbursed
effectiveness by increasing
loan origination to the smaller
businesses served by these
lenders, across wide geo-
graphic areas. Desi Volker is a financial economist in the Federal Reserve Bank of New York’s Research
and Statistics Group. Email: desi.volker@ny.frb.org.

The views expressed in this article are those of the author and do not necessarily reflect
the position of the Federal Reserve Bank of New York or the Federal Reserve System. To
view the author’s disclosure statement, visit https://www.newyorkfed.org/research/
epr/2022/epr_2022_PPPLF_volker.

Federal Reserve Bank of New York  Economic Policy Review 28, no. 1, June 2022 185
The Paycheck Protection Program Liquidity Facility

lenders with generous loan origination and processing fees; in addition, for larger approved
lenders, the loans provided an attractive interest rate relative to the cost of funding. However,
for some smaller lenders, including community banks and fintechs, these incentives were per-
ceived to be insufficient to induce broad participation in the program. Balance-sheet
constraints were an additional hindrance to lender participation.
To provide an impetus for program participation, as well as liquidity at attractive rates,
the Federal Reserve, with the backing of the Secretary of the Treasury, established the
Paycheck Protection Program Liquidity Facility (PPPLF) on April 8, 2020.2 Pursuant to
Section 13(3) of the Federal Reserve Act, the regional Federal Reserve Banks were autho-
rized to extend nonrecourse credit to eligible financial institutions participating in the
PPP, with PPP loans as collateral. While the facility’s direct aim was to bolster the effec-
tiveness of the PPP and thereby provide relief to small businesses affected by COVID-19,
more generally it served a purpose similar to that of other 13(3) facilities in providing
liquidity to credit markets, as per the Federal Reserve’s role as lender of last resort when
private liquidity becomes scarce. By extending much needed cheap liquidity to small PPP
lenders, the PPPLF helped boost PPP loan origination across wide geographic areas and in
underserved and underprivileged business communities, in line with the guidance in the
CARES Act.
In this article, we lay out the background and main features of the PPPLF, discuss the
intended aim of the facility, and analyze loan take-up, the facility’s impact on lender participa-
tion in the PPP, and PPP loan disbursements.

1. The Paycheck Protection Program
The CARES Act was aimed at responding to the COVID-19 outbreak and addressing its eco-
nomic impact. Among other provisions, the act extended relief to small businesses affected by
COVID-19 by establishing funding for forgivable bridge loans and providing additional
funding for grants and technical assistance. The PPP, a Section 7(a) loan program of the Small
Business Act (15 U.S.C 636), was an important part of these efforts, aimed at providing a life-
line to small businesses to help them maintain payroll, thereby keeping workers paid and
employed during the crisis. Congress issued guidance to prioritize small businesses that
operate in underserved and rural markets and/or that are controlled by veterans, members of
the military, or individuals from socially or economically disadvantaged communities. Initially,
$349 billion was authorized in PPP funds for forgivable government-guaranteed loans to small
businesses to cover their costs related to payroll (including salaries and benefits), as well as
utility, mortgage, and rent payments.
The general features of the program were laid out in the CARES Act and detailed further in
the interim final rule issued by the SBA in consultation with the Secretary of the Treasury. The
first phase of the program was open from April 3 to June 30, 2020; however, available funds
were quickly exhausted. Given the PPP’s popularity and the continuing need to support small
businesses as the pandemic persisted, lawmakers replenished the total available funds, refined
rules and requirements, and extended the program until May 31, 2021. As of that date,
11,823,594 loans were approved for a total of nearly $800 billion.

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The Paycheck Protection Program Liquidity Facility

1.1 Eligible Borrowers

To be eligible for PPP loans, businesses needed to have 500 or fewer employees3 and be
adversely affected by COVID-19 and the measures enacted to contain its spread. Businesses had
to be operational on February 15, 2020, in order to be eligible and must have had employees for
whom they paid salaries and payroll taxes, or hired independent contractors.4 The same loan
terms applied to all applicants, and full principal loan amounts qualified for forgiveness as long
as employee and compensation levels were maintained (with some caveats). Businesses had to
submit a PPP loan application to an SBA-approved lender, along with the documentation neces-
sary to establish eligibility, including payroll records and tax filings or income and expenses
from a sole proprietorship.5 As part of the application, the borrower had to provide a good-faith
certification that the current economic uncertainty made the loan necessary to support ongoing
operations and that the loan would be used to retain workers and maintain payroll or to make
mortgage, lease, and utility payments. No pledge of collateral and no personal guarantee were
required. Loans were initially capped at one per applicant; however, a second draw was later
allowed. Loan applications were processed in the order in which they were received by the SBA,
not by when the applications were submitted to lenders, an approach that, especially in the first
round of the program, had significant implications for loan allocations.

1.2 Terms of Credit

The maximum PPP loan amount for which businesses could apply was set to the lesser of
$10 million or an amount equal to 2.5 times the average monthly payroll costs from the previ-
ous year.6 The interest rate on the loan was set at a fixed rate of 1 percent, in order to provide
low-cost funding for borrowers and at the same time offer an attractive interest rate for lenders
relative to the cost of funding for comparable maturities.7 Borrowers were not required to pay
PPP loan fees to either the lender or the SBA, and interest payments were deferred initially for
six months (then extended to ten months) after the covered period. The loans had a two-year
maturity after approval, extended to five years for loans issued after June 5, 2020. Prepayment
was possible, with no prepayment fees or penalties. For loans with a remaining balance after a
reduction based on loan forgiveness, the remaining balance was guaranteed by the SBA and
forgiven loan amounts were tax free for federal tax purposes.
An important feature of the PPP was loan forgiveness. To qualify for forgiveness, borrowers
had to show that they had not decreased their full-time employee head count or reduced sala-
ries and wages by more than 25 percent (later increased to 40 percent) for any employee who
made less than $100,000 in 2019. They needed to maintain payroll levels and employee count
for the covered period (between eight and twenty-four weeks after the loan was originated).
Firms that had laid off employees or reduced salaries were given time to restore their full-time
employment and salary levels to qualify for loan forgiveness. The amount eligible for loan for-
giveness was conditional on the total loan amount and its use (that is, the proportion of the loan
used to finance eligible qualifying expenses, such as payroll, salaries, mortgage/rent payments,
and utilities as detailed above). At least 75 percent (lowered eventually to 60 percent) of the loan
proceeds had to be used for payroll expenses for the loan’s entire principal to be forgiven. If a
lesser amount was dedicated to payroll, the forgivable amount would be reduced proportionally.

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The Paycheck Protection Program Liquidity Facility

1.3 Eligible Lenders

Normally, SBA-guaranteed loans are issued by an existing network of banks that are SBA-
approved lenders; however, for the purposes of the PPP, the list of lenders with authority to
make covered loans was extended to include additional lenders determined by the SBA and the
Secretary of the Treasury to have the necessary qualifications to process, close, disburse, and
service SBA-guaranteed loans. Many banks, credit unions, fintech lenders, and online lending
marketplaces that were not already SBA-approved lenders but were willing to participate in the
program were encouraged to apply to become PPP lenders. To provide expeditious relief to
small businesses, the SBA gave delegated authority to all approved PPP lenders and stream-
lined the requirements of the regular Section 7(a) loan programs. Existing SBA loan programs
required lenders to assess the borrower’s creditworthiness and required borrowers to post col-
lateral and issue a personal guarantee for the loan, as well as a certification that the borrower
couldn’t secure credit elsewhere. These requirements and other regular 7(a) lending criteria
were waived for PPP loans; lenders could rely instead on certifications of the borrower in order
to determine borrower eligibility, as well as eligibility of the loan amount, the use of loan pro-
ceeds, and the forgivable amount. Lenders had to comply with the applicable lender
obligations set forth in the SBA’s interim final rule but were not held liable for borrowers’
failure to comply with program criteria or for any misrepresentations made by borrowers in
connection with a request for PPP loan forgiveness.

1.4 Incentives for Lenders

The SBA reimbursed authorized lenders for originating and processing covered loans at a rate
based on the balance of the financing outstanding for the disbursement of the loans,8 a rate
that ranged from 1 percent to 5 percent. In particular, lenders originating PPP loans with total
loans outstanding of up to $350,000 would receive a fee of 5 percent of the principal; lenders
with PPP loans outstanding from $350,000 to $2 million would receive a fee of 3 percent of the
principal; and lenders with PPP loans outstanding above $2 million would receive a fee of
1 percent of the loan principal.
By originating and holding PPP loans on their balance sheets, banks could potentially be
exposed to increased regulatory capital requirements.9 While the CARES Act specified that
PPP-covered loans originated by a banking organization would carry a zero percent risk
weight and therefore would not affect the bank’s risk-based capital requirements, PPP loans
held on a bank’s balance sheet could potentially affect the bank’s leverage-based regulatory
capital requirements and its liquidity coverage ratios (LCR). To alleviate this issue and give
lenders an incentive to participate, the pertinent regulatory agencies—the Federal Reserve, the
Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corpora-
tion (FDIC)— further specified that PPP loans and the lines of credit extended under the
PPPLF would be exempt from inclusion in calculations of all regulatory capital requirements
of banks and bank holding companies, including risk-based and leverage-based capital and for
LCR purposes.
The federal agencies that regulate financial institutions generally require institutions to clas-
sify certain loan modifications as troubled debt restructurings (TDRs). The CARES Act and the

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The Paycheck Protection Program Liquidity Facility

interim final rule issued by the SBA, in consultation with the Secretary of the Treasury, allowed
financial institutions to suspend such requirements on PPP loan modifications. To provide
further incentives for lenders to participate, covered PPP loans were eligible to be sold in the
secondary market. No fees would be collected by the SBA for any guarantee sold into the
secondary market and the loans would continue to receive a risk weight of zero percent. Insured
depository institutions and credit unions that would restructure PPP-covered loans were given
temporary relief from TDR accounting standards and disclosures for the purposes of compli-
ance with FDIC requirements.

1.5 Program Implementation Hurdles and Overall Success

Since the volume of applications for PPP loans was a multiple of the regular volume for SBA
loans, a variety of technical implementation issues arose in the program’s initial phase. In the
first few days of the PPP, the large volume of applications overwhelmed the SBA’s application
system and its computers crashed,10 raising the need to create a backup system. The internal
processes of small banks and other approved small lenders faced similar constraints in dealing
with the unprecedented volume of applications. Even larger banks such as Wells Fargo and
Bank of America ran into capacity problems.11 Some lenders cited uncertainty about the nature
of accountability in borrower screening as another factor that delayed the processing of appli-
cations. In the initial phase of the PPP, many of the details about program implementation
remained somewhat unclear.
Overall, the PPP provided attractive incentives for both borrowers and lenders to participate
in the program. PPP loans had very generous terms compared to existing SBA-backed loans,
with an interest rate substantially lower than that under regular 7(a) loan programs (which are
commonly used in lender-of-last-resort situations), requiring no SBA and lender fees, and defer-
ring interest and principal payments for at least six months. At the same time, from the lenders’
perspective, the interest rate on the loans and the generous origination and processing fees were
quite attractive in an environment of very low interest rates. The PPP provided significant flexi-
bility along many dimensions: Because of the reduced eligibility requirements, it had a broad
base of potential borrowers; it did not discriminate against applicants who had been denied
credit previously; and no pledges of collateral or personal guarantees were needed. Furthermore,
the program significantly extended the base of potential lenders beyond existing SBA-approved
lenders to include small banks, fintechs, and online marketplaces.
Critical views regarding the program’s design and effectiveness were raised along a few dimen-
sions, including whether the program was sufficiently funded to meet the demand for loans,
whether credit allocation was in line with the intended aim of the program, and whether the
program had the intended effects on employment. While the allocated funds in the first round of
the PPP were clearly insufficient, they were replenished in the subsequent rounds. Liu and Volker
(2020a) and Granja et al. (2020) show that the geographical distribution of PPP loans in the first
round of funding did not reflect the severity of the economic impact of the pandemic. This
uneven distribution was later mitigated with the subsequent rounds of funding. Liu and Volker
(2020a) point to the importance of relationship lending for the allocation of PPP loans in the first
round of the program and to the significant role played by community banks. James, Lu, and Son
(2021) confirm these findings and suggest that the focus on relationship lending allowed

Federal Reserve Bank of New York  Economic Policy Review 28, no. 1, June 2022 189
The Paycheck Protection Program Liquidity Facility

community banks to respond faster to PPP loan requests than larger banks and to lend more
than larger banks relative to their assets. Li and Strahan (2020) also find that bank relationships
helped firms access PPP lending. In terms of funding allocation, Barrios et al. (2020) suggest that
funds from the PPP have been broadly allocated according to the distribution of eligible payrolls.
Granja et al. (2020) suggest that the employment effects of the PPP were small, while Autor et al.
(2020) and Barraza, Rossi, and Yeager (2020) find that the program was somewhat successful in
meeting its objective of preserving jobs during the pandemic, and that it had statistically and eco-
nomically significant effects on employment.

2. The Paycheck Protection Program Liquidity Facility
(PPPLF)
In order to provide quick relief to small businesses across all affected geographic areas, the SBA
encouraged non-SBA-approved lenders to apply to participate in the PPP, pledging an expedi-
tious approval process should applicants be deemed to possess the necessary qualifications to
issue SBA-guaranteed loans. There was some initial uncertainty about the criteria that poten-
tial lenders would have to meet, raising concerns about the breadth of participation among
small lenders. Furthermore, some smaller lenders, community banks, and fintechs reported
that given their higher funding costs relative to those of larger banks, the loan terms were not
attractive enough to encourage broad participation. Another issue affecting small lenders’
incentives to participate in the PPP was their balance-sheet capacity. For larger regulated bank
holding companies, a disincentive was the potential effect that holding PPP loans on balance
sheet would have on their regulatory capital.
To address funding cost issues, improve liquidity, and create the right incentives for the broadest
possible base of PPP-participating lenders, the Federal Reserve, with the backing of the Secretary of
the Treasury, announced on April 6, 2020, that it would establish a new Section 13(3) facility to
facilitate lending to small businesses through the PPP. Section 13(3) of the Federal Reserve Act
allows the Federal Reserve, with prior approval of the Secretary of the Treasury, to extend lending
in unusual and exigent circumstances to individuals, partnerships, and corporations through pro-
grams with broad-based eligibility. The new facility, the Paycheck Protection Program Liquidity
Facility, was aimed at bolstering the PPP by supplying liquidity to financial institutions participat-
ing in the program in the form of term financing on a nonrecourse basis backed by the SBA’s PPP
loans. Liu and Volker (2020b) provide an overview of the intended aim of the facility. Ultimately,
the new facility would serve a purpose broadly similar to that of other Section 13(3) facilities—that
is, to provide liquidity to credit markets and balance-sheet relief to financial institutions with the
aim of supporting economic activity, in line with both the Federal Reserve’s role as lender of last
resort and its monetary policy mandate. While other emergency facilities set up by the Federal
Reserve in response to COVID-19 potentially exposed taxpayers to a small risk of losses due to
potential borrowers’ default or a fall in the market value of the securities, the full principal of
PPPLF credit extensions was backed by PPP loans as collateral, loans that in turn have a full SBA
guarantee on their principal value. This lack of credit-risk exposure allowed the Federal Reserve to
impose no PPPLF participation fees on borrowers and to charge a low interest rate, thereby
encouraging relatively high take-up rates and acting as a significant boost to the PPP.

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The Paycheck Protection Program Liquidity Facility

2.1 Eligible Borrowing Institutions

On April 7, 2020, the Federal Reserve Board, with the approval of the Secretary of the Trea-
sury, authorized each of the regional Federal Reserve Banks to participate in the PPPLF,
pursuant to Section 13(3) of the Federal Reserve Act. Initially, the Board announced that eligi-
ble borrowers under the PPPLF would be limited to depository institutions originating PPP
loans, with a plan to quickly expand eligibility to all other nondepository institutions partici-
pating in the PPP. On April 30, 2020, access to the PPPLF was extended to all PPP lenders that
had a corresponding banking relationship with a depository institution with a master account
at the Federal Reserve. These included banks, credit unions, community development financial
institutions (CDFIs),12 members of the Farm Credit System, small business lending companies,
and financial technology firms. Eligible PPPLF borrowers that were depository institutions or
credit unions would participate in the facility through the regional Federal Reserve Bank in
whose District they were located. CDFIs would apply for a PPPLF credit line extension
through the Federal Reserve Bank of Cleveland; members of the Farm Credit System and small
business lending companies that were not depository institutions or credit unions would apply
through the Federal Reserve Bank of Minneapolis; and all other eligible borrowers would
apply through the Federal Reserve Bank of San Francisco. The initial announcement stated
that the facility would be operational for extending new lines of credit until September 30,
2020. However, because the PPP was extended beyond the initial phases, the PPPLF termina-
tion date for new lines of credit was also extended and was ultimately set at July 30, 2021.

2.2 Terms of Credit

Financial institutions participating in the PPP could finance themselves for issuing PPP loans
through the PPPLF, at attractive low rates of 35 basis points (65 basis points below the
1 percent fixed interest on PPP loans) and with no facility participation fees. Only
SBA-guaranteed PPP loans would be eligible to serve as collateral for borrowing under the
PPPLF, with the principal amount of an extension of credit equal to the principal amount of
the PPP loan pledged as collateral.13 There was no cap on the amount of credit that could be
extended to eligible financial institutions, except that the principal could not exceed that of the
PPP loans pledged as collateral. Eligible borrowers could pledge PPP loans that they had origi-
nated or purchased in the secondary market. Eligible borrowers pledging PPP loans purchased
on the secondary market needed to document that they were the beneficiary institution of the
SBA guarantee for the loan in order to get a PPPLF credit extension backed by the purchased
PPP loans. Extensions of credit under the facility would be made without recourse to the bor-
rower, given that the PPP loans pledged as collateral are fully guaranteed by the SBA. The
maturity date of an extension of credit under the facility was set to equal the maturity date of
the PPP loan pledged to secure the extension of credit. It would be accelerated if the underly-
ing PPP loan went into default, and the eligible PPPLF borrower would sell the PPP loan to the
SBA to exercise the SBA guarantee. Similarly, the maturity date of the extension of credit
would be accelerated to the extent of any loan forgiveness reimbursement received by the
PPPLF borrower from the SBA. The PPPLF credit line would be extinguished should a bor-
rower sell its PPP loans in the secondary market.

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The Paycheck Protection Program Liquidity Facility

2.3 Impact of Loans on Institutions’ Balance Sheets and Their
Regulatory Capital
One source of concern about lenders’ ability to participate in the PPP was balance-sheet
capacity and the effect of loans on regulatory requirements. Capital rules imposed by the
federal regulatory agencies (the Federal Reserve, the OCC, and the FDIC) require super-
vised banking organizations to comply with risk-based capital requirements (based on
risk-weighted assets) and leverage capital requirements (based on average total assets or
total leverage exposure). By virtue of originating PPP loans and holding them on their
balance sheets, banks participating in the PPPLF could potentially be subject to increased
regulatory capital requirements. Since PPP loans pledged at the PPPLF do not expose the
bank pledging them to any credit or market risk (given the nonrecourse nature of the
extension of credit under the PPPLF), the regulatory agencies deemed it appropriate to
exclude the effects of PPP-covered loans from banks’ regulatory capital. In particular,
banks could exclude exposures pledged as collateral to the PPPLF from their total leverage
exposure as well as from their average total consolidated assets, their advanced approaches
total risk-weighted assets, and their standardized total risk-weighted assets. Similarly, PPP
loans would be excluded from calculations pertinent to the community bank leverage
ratio. The interim final rule issued by the Federal Reserve in conjunction with the OCC
and the FDIC codified these exemptions by specifying that banks originating PPP loans
relying on financing under the PPPLF would be exempt from the regulatory capital
requirements applied to bank holding companies.
These exemptions, combined with the attractive interest rate, loan origination fees, and the
liquidity provided under the PPPL facility, helped give lenders an incentive to participate in
the PPP. The additional liquidity PPP lenders obtained through the PPPLF helped increase
their capacity to originate additional PPP loans and satisfy the large demand from small busi-
nesses for such loans. The lifeline to small businesses that the PPP provided and the boost to
the PPP through the PPPLF liquidity injections helped to limit small business failures and to
keep workers employed and the economy going.

2.4 Community Development Financial Institutions (CDFIs)

One group of PPP lenders that was strongly encouraged to participate in the PPP and that par-
ticularly benefited from access to the PPPLF were community development financial
institutions. CDFIs are mission-oriented lenders certified by the Treasury Department that
focus on financing small businesses and individuals in low economic opportunity areas, and
communities with minority or underprivileged backgrounds. The cost of funding for CDFIs is
generally higher than that for traditional banks, which can access the Federal Reserve’s dis-
count window and borrow at reasonably low rates in credit markets in the current low-rate
environment. Around half of the existing CDFIs are depository community banks, while the
rest are loan funds and other nondepository institutions.
CDFIs that are depository institutions and have a master account at a Federal Reserve
Bank have access to the Federal Reserve’s discount window, while loan funds do not. For
loan funds, access to the PPPLF constituted a major incentive to participate in the PPP, by

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The Paycheck Protection Program Liquidity Facility

providing a cheap funding source to finance the origination of PPP loans. Access to the
PPPLF was also very useful for depository CDFIs that may not have been in “generally
sound financial condition” and therefore did not qualify for the discount window’s
primary credit. The rate for the discount window’s secondary credit, at 50 basis points
plus the primary credit rate, is significantly higher than the rate for extensions of credit
under the PPPLF.
Initially, CDFI loan funds faced hurdles in accessing credit through the PPPLF because of
the need to have a corresponding banking relationship with a depository institution with a
master account at the Federal Reserve, due to the latter’s operational complexities and capacity
limits for approvals, as well as the perceived risk. In the early summer of 2020 and during the
second round of the PPP, this issue was significantly mitigated as many depository institutions
agreed to establish correspondent banking relationships with loan funds and other nondeposi-
tory institutions participating in the program (Eggleston 2021). CDFIs’ broad participation in
the PPP was strongly encouraged, given their mission-oriented nature in serving underprivi-
leged communities, which typically have a harder time accessing credit through traditional
financial institutions. The CARES Act specifically instructed the SBA to issue guidance to
lenders to prioritize small businesses in underserved and rural markets, and those controlled
by veterans, members of the military, and individuals in socially and economically disadvan-
taged communities.

2.5 Fintechs

Media coverage reported that as soon as the CARES Act was announced, and especially
once the PPPLF was announced with its attractive incentives for small lenders, several
fintech companies lobbied the Treasury Department to allow them to participate in the
PPP.14 On April 9, 2020, the Treasury announced that it would allow fintechs to apply to
become PPP lenders. In the first few weeks of the PPP’s launch, the SBA approved the
applications of a few fintech companies, including PayPal, Intuit, and Square. PayPal
announced that it received approval on April 10, and as of the following Monday, it had
already received applications and had approved PPP loans. Similarly, on April 13, Square
Capital and Intuit’s QuickBooks Capital announced they had received approval to become
PPP lenders. QuickBooks Capital launched a new, free website, “Intuit Aid Assist,” to help
small businesses and self-employed individuals assess their eligibility to borrow under the
PPP as well as their eligible loan amount. Square Capital announced that it would operate
in partnership with Celtic Bank. In the later days of phase one of the PPP and in phase
two, several other fintech lenders were approved and disbursed loans, some in collabora-
tion with established traditional bank holding companies. Expansion of the pool of
approved PPP lenders to fintech companies sped up and simplified the loan application
and disbursement process for many small businesses, given the fintechs’ broad geographic
coverage, their automated application process, and their relatively more rapid and flexible
innovation capabilities compared to the more bureaucratic traditional banks. The pres-
ence of fintech lenders may also have helped expand the pool of potential applicants in the
first phase of the PPP, since traditional bank lenders had prioritized borrowers with exist-
ing banking relationships because doing so involved a lesser need for extensive screening.

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The Paycheck Protection Program Liquidity Facility

2.6 The Program’s Effectiveness

Overall, there is evidence that the PPPLF was successful in bolstering the effectiveness of the
Paycheck Protection Program. The liquidity provision through the PPPLF enhanced the ability
of many small lenders to originate PPP loans, and PPPLF take-up increased significantly in the
second half of 2020 and early 2021. Arguably, the introduction of the PPPLF mitigated many
of the initial setbacks of the PPP, when small businesses’ demand for PPP loans was signifi-
cantly higher than lenders’ capacity to originate and process loans and when the insufficient
PPP funds in place were being rapidly exhausted. For example, Anbil, Carlson, and Styczynski
(2021), using an instrumental variables approach, find that commercial banks that accessed
PPPLF funding originated more than twice as many PPP loans relative to their total assets than
banks that did not access PPPLF funding. Lopez and Spiegel (2021) find that both the PPP and
the PPPLF had a positive effect on the growth in small business and farm lending in the first
half of 2020, with the PPPLF having a significant impact on increasing lending of small and
medium-sized banks. The results presented in the next section are in line with these findings,
with smaller depository institutions and nondepository institutions relying more on PPPLF
funding to finance PPP loan origination.

3. PPPLF Take-Up
As required by Section 13(3) of the Federal Reserve Act, the Federal Reserve has each week
publicly disclosed PPPLF credit extensions on a nationwide aggregated basis. In this section,
we examine the distribution of PPPLF loans over time by PPPLF borrower/PPP lender size
and industry.

3.1 Aggregate Lending

We begin with the total outstanding balance of PPPLF loans over time, shown in Chart 1. We
can see that the aggregate balance jumped sharply in the first few months after the PPPLF
became operational; it then gradually declined before rebounding again. The aggregate balance
of PPPLF credit extensions can decline for the following reasons: (1) forgiveness of the under-
lying PPP loans pledged as collateral by the borrowing financial institution; (2) repayment of
the underlying PPP loans; or (3) sale by the borrowing institution of the underlying PPP loans
in the secondary market or to the SBA to realize the full principal guarantee. As small busi-
nesses that received PPP loans apply for and are granted forgiveness, the PPP lenders with
PPPLF credit extensions backed by those loans need to draw down the PPPLF balance accord-
ingly, because the collateral needs to match the disbursement. For a similar reason, the PPPLF
balance declines when the underlying PPP loans pledged as collateral are repaid by small
businesses.
Chart 2 shows the total cumulative balance of PPPLF loans disbursed over time. We can see
that the balance gradually increases over the life of the program, with steeper climbs around
the early months when the PPPLF became operational in the spring of 2020 and at the

Federal Reserve Bank of New York  Economic Policy Review 28, no. 1, June 2022 194
The Paycheck Protection Program Liquidity Facility

Chart 1
PPPLF Aggregate Loans Outstanding

Billions of dollars

Apr 20 Jul 20 Oct 20 Jan 21 Apr 21

Sources: PPPLF transaction-specific disclosures from the Board of Governors of the Federal Reserve System;
authors’ calculations.
Note: The chart shows the total outstanding amount of active PPPLF loans from each monthly report for the
PPPLF.

Chart 2
Aggregate Cumulative Origination of PPPLF Loans

Billions of dollars

150

100

0
Apr 20 Jul 20 Oct 20 Jan 21 Apr 21

Sources: PPPLF transaction-specific disclosures from the Board of Governors of the Federal Reserve System;
authors’ calculations.
Note: The chart shows the total cumulative amount of PPPLF loans originated over time.

Federal Reserve Bank of New York  Economic Policy Review 28, no. 1, June 2022 195
The Paycheck Protection Program Liquidity Facility

beginning of 2021. The later jump in the PPPLF can be explained by a rule in the Economic
Aid Act, passed on December 27, 2020. The rule allowed both first-draw loans for small busi-
nesses that did not borrow in the first and second rounds of the PPP and second-draw loans
for those that had existing PPP loans and applied for new loans due to continuing exigence.
The extension of eligibility to second-draw loans stimulated another wave of PPP lending, fol-
lowed by PPPLF applications for credit extensions by PPP lenders.

3.2 PPPLF Loan Distribution by PPPLF Borrower/PPP
Lender Category
To understand the distribution of PPPLF credit lines by borrowing financial institutions,
Charts 3 and 4 break down outstanding balance and cumulative origination by bor-
rower type.
We determine PPPLF borrower/PPP lender type by merging PPPLF data with RSSD attri-
butes and bank asset sizes (based on RSSD ID or ABA number)15 as per the December 2020
disclosure summary of the Federal Financial Institutions Examination Council’s (FFIEC)
Central Data Repository Public Data Distribution website, which contains call reports and
uniform bank performance reports for most FDIC-insured institutions.
We classify regional banks (including national banks) as participating institutions with
more than $10 billion in total assets, community banks (including CDFIs that are depository
institutions) as those having less than $10 billion in assets, and the remaining institutions for
which assets and attributes are not available based on the FFIEC repository as nondepository
institutions. All PPPLF-participating financial institutions are classified into one of the three
categories.
From Charts 3 and 4, we can see that at the beginning of the PPPLF, increases in the
balance were mainly driven by national, regional, and community banks. The second surge in
the PPPLF balance in early 2021 largely came from nondepository institutions.
To shed more light on the distribution of PPPLF loans by PPPLF borrower/PPP lender cate-
gory relative to PPP loan originations, we merged the above data (PPPLF disclosures, RSSD
attributes, and asset size from the FFIEC reports) with the PPP data disclosed by the SBA. The
main difficulty in merging the data is that the SBA’s PPP disclosures do not provide the ABA
number or RSSD ID of the lending financial institutions. Participating institutions originating
PPP loans are instead identified in the data based on their unique name and the city and state
in which they are located. While the matching is not perfect, we follow a detailed data-cleaning
process to match the reported names and locations with the information available from the
PPPLF disclosures, and we manually confirm that the maximum number of lenders is matched
across data sets.
Next, we study reliance on the PPPLF by institution type. Chart 5 illustrates cumulative
PPPLF credit lines by institutional category following the classification delineated above.
Community banks and CDFIs that are depository institutions borrowed the most from the
PPPLF, followed by nondepository institutions. National and regional banks borrowed
the least.
Chart 6 shows the total PPP distributed loan amounts by lender type, for the matched
sample with PPPLF borrowing institutions. Since not all PPP lenders applied for PPPLF

Federal Reserve Bank of New York  Economic Policy Review 28, no. 1, June 2022 196
The Paycheck Protection Program Liquidity Facility

Chart 3
PPPLF Loans Outstanding by PPPLF Borrower

Regional banks Community banks Nondepository institutions

Billions of dollars
40

0
Apr 20 Jul 20 Oct 20 Jan 21 Apr 21

Sources: PPPLF transaction-specific disclosures from the Board of Governors of the Federal Reserve System;
institution characteristics from the Federal Financial Institutions Examination Council’s (FFIEC) Central
Data Repository; authors’ calculations.
Note: The chart shows the total outstanding amount of active PPPLF loans, broken down by PPPLF borrower.

Chart 4
Cumulative PPPLF Loan Origination by PPPLF Borrower

Regional banks Community banks Nondepository institutions

Billions of dollars

0
Apr 20 Jul 20 Oct 20 Jan 21 Apr 21

Sources: PPPLF transaction-specific disclosures from the Board of Governors of the Federal Reserve System;
institution characteristics from the Federal Financial Institutions Examination Council’s (FFIEC) Central
Data Repository; authors’ calculations.
Note: The chart shows the total cumulative amount of PPPLF loans originated over time, broken down by
PPPLF borrower.

Federal Reserve Bank of New York  Economic Policy Review 28, no. 1, June 2022 197
The Paycheck Protection Program Liquidity Facility

Chart 5
Total PPPLF Borrowed by Institution Type

Billions of dollars

0
Regional bank Community bank Nondepository institution

Sources: PPPLF transaction-specific disclosures from the Board of Governors of the Federal Reserve System;
institution characteristics from the Federal Financial Institutions Examination Council’s (FFIEC) Central
Data Repository; authors’ calculations.
Note: The chart shows the cumulative PPPLF amount borrowed by institution type.

Chart 6
Total Dollar Amount of PPP Loans Disbursed by PPP Lender

Billions of dollars

100

0
Regional bank Community bank Nondepository institution

Sources: PPP reports from the U.S. Small Business Administration; PPPLF transaction-specific disclosures
from the Board of Governors of the Federal Reserve System; institution characteristics from the Federal
Financial Institutions Examination Council’s (FFIEC) Central Data Repository; authors’ calculations.
Note: The chart shows total PPP loans originated by each lender type for the matched sample of PPP lenders
with PPPLF borrowers.

Federal Reserve Bank of New York  Economic Policy Review 28, no. 1, June 2022 198
The Paycheck Protection Program Liquidity Facility

credit lines, the total PPP loan amounts shown in the chart are only a fraction of the entire
PPP loan disbursements16. The limited coverage may also be due (although to a lesser
extent) to the inherent issues with matching the data, given that the reported classifica-
tions of PPP lenders and PPPLF borrowers in the data disclosures are not
perfectly aligned.
The matched data suggest that regional and national banks, as well as community banks
(including CDFIs that are depository institutions), were the largest PPP loan originators,
lending at similar levels in terms of dollar amount among the matched PPPLF borrower/PPP
lender group. Nondepository institutions, on the other hand, originated less than half the
dollar amount of PPP loans originated by regional and community banks as per our
classification.
This may be the case for several reasons. First, nondepository institutions are more likely
than depository institutions to lend to the smallest of small businesses, since larger and more
established small businesses are more likely than smaller ones to have existing banking rela-
tionships. The maximum principal dollar amount of PPP loans is based on payroll numbers
(over a representative month in the previous year); therefore, smaller businesses can apply for
smaller loans relative to larger businesses with higher payroll numbers. Second, nondepository
institutions had a slower start in participating in both the PPP and the PPPLF—the PPP
because of the requirement to be an SBA-approved lender, and the PPPLF because of the
delayed eligibility and the need to have a correspondent banking relationship with a depository
institution with a master account at the Federal Reserve. Third, again the limitations inherent
in the data matching and classification given the data constraints in the disclosures imply that
some misclassification of institutions or matched PPP lender/PPPLF borrower pair cannot be
ruled out.
Looking at this issue from a different angle, Chart 7 shows the total PPP distributed loan
dollar amounts for PPP lenders with PPPLF credit lines compared with those that relied on
other funding sources to finance PPP loan origination.
As we can see, PPP lenders that borrowed from the PPPLF to finance PPP loan origina-
tions issued a significantly smaller PPP loan dollar amount. Since PPP loans are
proportional to the small businesses’ payroll numbers, the dollar amount of PPP loans
originated depends on the average size of the small businesses served by the PPP lender. A
lender could originate many PPP loans and still have a relatively low total dollar amount
of PPP loans outstanding depending on its PPP clientele base. This is confirmed by Charts
8 and 9. Chart 8 shows the total number of PPP loans originated by each lender category
for the matched PPP lender/PPPLF borrower sample. Nondepository institutions origi-
nated a disproportionately large number of loans relative to the total disbursed dollar
amount. Chart 9 shows total PPP loans disbursed by PPP lenders that received PPPLF
credit extensions and those that did not. The difference in the number of PPP loans dis-
bursed by PPPLF participating and nonparticipating institutions is a lot smaller than that
based on dollar amount disbursed. Taken together, these results are in line with the con-
jecture that smaller PPP lenders and nondepository institutions are more likely to attract
small businesses at the lower end of the size scale, which have fewer employees and lower
payroll costs.
Chart 10 adds to these findings by showing the ratio of the PPPLF credit line balance to
the dollar amount of PPP loans extended for each institution type in the matched PPPLF

Federal Reserve Bank of New York  Economic Policy Review 28, no. 1, June 2022 199
The Paycheck Protection Program Liquidity Facility

Chart 7
Total PPP Loan Dollar Amount Disbursed

Billions of dollars

500

400

300

200

100

0
No PPPLF Received PPPLF

Sources: PPP reports from the U.S. Small Business Administration; PPPLF transaction-specific disclosures
from the Board of Governors of the Federal Reserve System; institution characteristics from the Federal
Financial Institutions Examination Council’s (FFIEC) Central Data Repository; authors’ calculations.
Note: The chart shows the total dollar amount of PPP loans disbursed by PPP lenders that received PPPLF
credit extensions and those that did not.

Chart 8
Total Number of PPP Loans Disbursed by Lender Type

Millions

2.0

1.5

1.0

0.5

0
Regional bank Community bank Nondepository institution

Federal Reserve Bank of New York  Economic Policy Review 28, no. 1, June 2022 200
The Paycheck Protection Program Liquidity Facility

Chart 9
Total Number of PPP Loans Disbursed by PPPLF Participation Status

Millions

0
No PPPLF Received PPPLF
Sources: PPP reports from the U.S. Small Business Administration; PPPLF transaction-specific disclosures
from the Board of Governors of the Federal Reserve System; institution characteristics from the Federal
Financial Institutions Examination Council’s (FFIEC) Central Data Repository; authors’ calculations.
Note: The chart shows total PPP loans disbursed by PPP lenders that received PPPLF credit extensions and
those that did not.

Chart 10
Fraction of PPP Loans Funded with PPPLF Borrowing

Aggregate PPPLF/PPP ratio
0.6

0.4

0.2

0
Regional bank Community bank Nondepository institution

Sources: PPP reports from the U.S. Small Business Administration; PPPLF transaction-specific disclosures
from the Board of Governors of the Federal Reserve System; institution characteristics from the Federal
Financial Institutions Examination Council’s (FFIEC) Central Data Repository; authors’ calculations.
Note: The chart shows the fraction of PPP loans originated that were funded by PPPLF borrowing, broken
down by lender type.

Federal Reserve Bank of New York  Economic Policy Review 28, no. 1, June 2022 201
The Paycheck Protection Program Liquidity Facility

borrower/PPP lender sample. We can see that reliance on PPPLF borrowing to finance PPP
loan originations declines with the asset size of the financial institution. National and
regional banks (with more than $10 billion in assets) rely the least on the PPPLF to finance
PPP loans, with about 20 percent of the PPP loans financed by liquidity obtained through
the PPPLF.
Community banks and nondepository institutions, on the other hand, relied more
heavily on PPPLF financing, with about 40 percent and 60 percent, respectively, of their
PPP loan originations funded through the PPPLF. One explanation for the lower use of
the PPPLF by national and regional banks is that during the course of the pandemic,
banks saw a large inflow of deposits from both consumers and corporate clients, providing
an alternative funding source. This is in line with the pattern of PPPLF usage seen
in Chart 5.
Erel and Liebersohn (2020) ﬁnd that fintechs were disproportionately used in zip codes
with fewer bank branches, lower incomes, and a larger minority share of the population, as
well as in industries with little ex ante small business lending, suggesting that fintechs
expanded the overall supply of PPP lending rather than substituting for traditional banks. Our
results suggest that nondepository institutions (which include fintechs) took disproportionate
advantage of the PPPLF to fund PPP loans and were likely to have served smaller businesses.
Taken together with the evidence in Erel and Liebersohn (2020), our results indicate that the
PPPLF played an important role in expanding the supply of credit to PPP lenders, allowing the
origination of more PPP loans in underserved areas.

3.3 Geographical Distribution of Loans for Community Banks

The ratio of the cumulative dollar amount of PPPLF borrowing to the cumulative dollar
amount of PPP loans originated by community banks by state is shown in Exhibit 1. Com-
munity banks here are defined as depository financial institutions with less than
$10 billion in total assets, including CDFIs that are depository institutions. While the geo-
graphical distribution of PPPLF borrowing by community banks for PPP loan origination
is fairly equal across states, community banks located in the Great Plains, the South, and
the Northeast seem to have borrowed relatively more from the PPPLF to finance PPP loan
origination.

3.4 Loan Distribution by Industry

In what follows, we look at the breakdown by industry of the small businesses that received
PPP loans, for those loans originated by PPP lenders that received PPPLF funding and those
that did not receive PPPLF funding. To do this, we first calculate the cumulative PPP loans
received by small businesses in a given industry (based on NAICS codes) that were originated
by each type of financial institution (using our three-category classification for lender type
based on total assets). We then link these to the matched PPPLF borrowing/PPP lending finan-
cial institutions to obtain the industry breakdown of PPP loans originated for financial
institutions that received PPPLF funding.

Federal Reserve Bank of New York  Economic Policy Review 28, no. 1, June 2022 202
The Paycheck Protection Program Liquidity Facility

Exhibit 1
PPPLF Borrowing/PPP Lending Ratio for Community Banks by State

.75, 1
.5, .75
.25, .5
0, .25

Sources: PPP reports from the U.S. Small Business Administration; PPPLF transaction-specific
disclosures from the Board of Governors of the Federal Reserve System; institution characteristics
from the Federal Financial Institutions Examination Council’s (FFIEC) Central Data Repository; authors’
calculations.
Note: The map shows the ratio of cumulative PPPLF borrowing to PPP loans originated for community banks,
based on the state in which the community bank is located.

Chart 11 shows this breakdown. As we can see, PPP lenders that received PPPLF funding
disbursed PPP loans to small businesses across different industries in a way that is largely
similar to that of PPP lenders that did not receive PPPLF funding.
We take a deeper look at this issue and show the breakdown by industry (of the small busi-
nesses receiving PPP loans) for PPP lenders that did receive PPPLF funding, broken down by
lender type. We proceed as above and calculate total PPP loans by industry for each financial
institution type. Then we match the PPPLF borrowers to PPP lenders and categorize the loans
according to institution type (using our categorization based on total assets: regional bank,
community bank, and nondepository institution), conditioned on having received PPPLF
funding. We then show the (dollar amount) ratio of PPP loans disbursed by industry for each
institution type relative to its total PPP loans disbursed.
Chart 12 shows this breakdown. Regional and community banks behaved similarly in terms
of disbursing PPP loans to small businesses across sectors. However, nondepository institu-
tions that borrowed from the PPPLF seem to have financed a slightly different clientele of
small businesses with PPP loans, with a higher concentration in Transport and Warehouse
Services, Support Services, Retail, and “Other” (which includes all other sectors not catego-
rized, excluding Public Administration).
Overall, the evidence presented in this section suggests that PPPLF take-up has been signif-
icant. Furthermore, it suggests that smaller PPP lenders (including nondepository institutions)
relied more heavily on PPPLF financing to originate PPP loans, and that they were likely to
serve smaller businesses with fewer employees and lower payroll costs. When it comes to loan

Federal Reserve Bank of New York  Economic Policy Review 28, no. 1, June 2022 203
The Paycheck Protection Program Liquidity Facility

Chart 11
Industry Breakdown of PPP Loans Originated by Financial Institutions That Received
and Did Not Receive PPPLF Funding

Without PPPLF loans With PPPLF loans

Percent of loan amount given

.15

.10

.05

0
ts A nd
gri Fo od
an dR ec cu
rea ltu re
Co ns tru tio
cti n
Ed uc nati o
on
He Fin
alt an ce
hC a
na Ma Inf
Ma gemna orm reati on
nu fac nt e
tio Ot he r (E No nc las M tur
ini ing
n
da Pu xc
blil. P u bli cA sif g
iab le
cA dm ini dm in. )
mo Ar Su
s
Re tratio
al Es n tat e
co Te c pp o rt S Re t ail
Tra hnic ervic
ns po l Sea
rt/W rvi e s
Ac are
Utho c
use s
e
Wh ties
ole ili
sa le

Sources: PPP reports from the U.S. Small Business Administration; PPPLF transaction-specific disclosures
from the Board of Governors of the Federal Reserve System; institution characteristics from the Federal
Financial Institutions Examination Council’s (FFIEC) Central Data Repository; authors’ calculations.
Note: The chart shows the share of PPP loans given to small businesses in different industries by institutions
that received PPPLF funding and those that did not.

distribution by industry, there are no major differences between PPPLF-participating and
PPLF-nonparticipating institutions.

4. Conclusion
In this article, we laid out the background and rationale for the creation of the Federal
Reserve’s Paycheck Protection Program Liquidity Facility. We covered the salient features of
the PPP and the PPPLF, discussed the intended aim of the facility, and analyzed the facility’s

Federal Reserve Bank of New York  Economic Policy Review 28, no. 1, June 2022 204
The Paycheck Protection Program Liquidity Facility

Chart 12
Industry Breakdown of PPP Loans Originated by Type of Financial Institution,
Conditional on Receiving PPPLF Funding

Regional bank Community bank Nondepository institution

Percent of loan amount given

.20

.15

.10

.05

0 and
Arts A g ricu foo d
and Rec rea ltur e
Con stru t
ctio i on
Edu cati n
on
Hea Fin anc e
Info lth C are
rma
tion
Ma nag em tion
Ma nuf actu ent
ring
M
oda Oth er ( Exc Non clas inin
sifia g
Pub l. P ubli
lic A c Adm ble
dm inis trat in.)
om Rea l Es ion
tate
Sup por Ret ail
Acc Tra Tec
nsp hnic
ort/
t Se
al S
Wa
r
erv vice
ices s
reh ous e
Wh Util ities
oles ale

Sources: PPP reports from the U.S. Small Business Administration; PPPLF transaction-specific disclosures
from the Board of Governors of the Federal Reserve System; institution characteristics from the Federal
Financial Institutions Examination Council’s (FFIEC) Central Data Repository; authors’ calculations.
Note: The chart shows the breakdown by industry of PPP loans originated for PPP lenders that received
PPPLF funding, by lender type.

loan take-up and impact on lender participation in the program and on PPP loan
disbursements.
Empirical evidence based on the available data suggests that the PPPLF helped bolster the Pay-
check Protection Program’s effectiveness. By facilitating access to credit for all PPP lenders at low
rates and with a duration matching that of the underlying PPP loans, it gave lenders an incentive to
participate in the PPP. The affordable access to credit was of particular relevance for smaller institu-
tions with less than $10 billion in total assets and for nondepository institutions, increasing the
ability of these lenders to originate PPP loans. We showed that smaller PPP lenders (including non-
depository institutions) relied more heavily on PPPLF financing to originate PPP loans. Given that

Federal Reserve Bank of New York  Economic Policy Review 28, no. 1, June 2022 205
The Paycheck Protection Program Liquidity Facility

smaller lenders are generally more likely to reach communities underserved by larger traditional
banks, the facility may have helped satisfy the guidance in the CARES Act to focus especially on
providing relief to small businesses in underprivileged communities.
Furthermore, by giving favorable regulatory capital treatment to PPP loans pledged as col-
lateral to the facility by supervised depository institutions and creating the necessary
conditions for a liquid secondary market for PPP loans, the PPPLF may have helped give
further impetus to broader participation by lenders in the PPP. Even though PPPLF participa-
tion is lower for larger banks than for smaller banks and nondepository institutions, the
assurance of having backstop PPPLF funding available to finance PPP loan origination is likely
to have positively affected PPP loan origination by larger banks as well. The positive impact of
the establishment of the PPPLF comes with no expected loss to the Federal Reserve and hence
taxpayers. Access to PPPLF credit is fully collateralized by pledged PPP loans, with the same
principal amount and maturity as the extended loans, and PPP loans enjoy a full SBA guaran-
tee with respect to both principal and interest.

Federal Reserve Bank of New York  Economic Policy Review 28, no. 1, June 2022 206
The Paycheck Protection Program Liquidity Facility

Notes

Acknowledgments: The author thanks Haoyang Liu for helpful discussions and feedback, an anonymous referee, and Dean
Parker for excellent research assistance.

1
Details on the program can be found at https://www.sba.gov/funding-programs/loans/covid-19-relief-options/
paycheck-protection-program.
2
An overview and details on the facility can be found at https://www.federalreserve.gov/monetarypolicy/ppplf.htm.
3
Eligible businesses included nonprofits, sole proprietorships, eligible self-employed individuals,
independent contractors, veterans’ organizations, and Tribal business concerns. Freelancers or contract or
gig economy workers could also apply. The term “employee” included individuals employed on a full-time,
part-time, or other basis, and businesses in certain industries could have more than 500 employees (up to 1,500
employees) if they met certain SBA criteria. The SBA applies complex affiliation criteria about parent companies and
subsidiaries in order to determine a business’s size; however, these were waived for the purposes of PPP loans for
certain businesses. The SBA’s interim final rule further specified that a business’s employees must have their principal
place of residence in the United States.
4
Applicants were ineligible for PPP loans if they were household employers, if any of the business’s owners
were delinquent or had defaulted on a loan from any federal agency, or if they had engaged in illegal activity or had
been convicted of a felony in the last five years.
5
Borrowers that did not have such documentation were required to provide other supporting documentation, such as
bank records, to demonstrate a qualifying payroll amount.
6
The maximum loan amount calculation was subject to a cap of $100,000 annual salary per employee. For seasonal
employers, this was set to 2.5 times the average monthly payments for payroll during the twelve-week period
beginning February 15, 2019, or March 1, 2019.
7
The CARES Act specifies that the interest rate on these loans should not exceed 4 percent. The SBA and the
Secretary of the Treasury initially set the interest rate at 0.5 percent. However, at a news conference on April 2,
Secretary Mnuchin announced that the interest rate would be raised to 1 percent to encourage smaller lenders,
including community banks, to participate in the program.
8
The fee reimbursement was to be made no later than five days after the disbursement of the covered loan.
9
Lenders could request that the SBA purchase the expected forgiveness amount of the PPP loan or pool of loans at
the end of week seven of the covered period of an originated PPP loan. Before that date, the lender had to either hold
the loan on its balance sheet or sell it in the secondary market.
10
See “SBA Computer System Crash Further Tangles PPP Loan Process,” PYMNTS.com, April 7, 2020, at https://
www.pymnts.com/loans/2020/sba-computer-system-crash-further-tangles-ppp-loan-process and “Small Business
Loans Site Crashes On First Day Of Reopening,” NPR, April 27, 2020, at https://www.npr.org/sections/coronavirus-
live-updates/2020/04/27/846197794/small-business-loans-site-crashes-on-1st-day-of-reopening.
11
See “How Central Texas’ Community Banks Are Handling the Deluge of PPP Loan Applications,” Austin Business
Journal, April 6, 2020, at https://www.bizjournals.com/austin/news/2020/04/06/how-central-texas-community-
banks-are-handling-the.html; “Judge: Banks Can Restrict PPP Applicants to Current Customers,” Arkansas Bankers
Association, April 14, 2020, at https://www.arkbankers.org/ABA/Resource_Center/bank_industry_news/
Judge__Banks_Can_Restrict_PPP_Applicants_to_Current_Customers.aspx; and “Bank of America Fields 10,000
Applications Hourly for SBA’s Small Business Relief Program,” San Francisco Business Times, April 3, 2020, at https://
www.bizjournals.com/sanfrancisco/news/2020/04/03/bank-of-america-fields-10-000-applications-hourly.html.
12
CDFIs are financial institutions, as defined in Article 12 U.S.C. Section 4702, that are not depository institutions or
credit unions.
13
PPP loans pledged as collateral would be valued at the full principal amount of the PPP loans, given the full SBA
guarantee.

Federal Reserve Bank of New York  Economic Policy Review 28, no. 1, June 2022 207
The Paycheck Protection Program Liquidity Facility

Notes (Continued)

14
See, for example, “Lenders Get 2nd Chance to Correct PPP Flaws,” Banking Dive, April 27, 2020. https://www.
bankingdive.com/news/lenders-second-chance-correct-ppp-flaws/576811/.
15
RSSD IDs are unique identifiers assigned to commercial banks or bank holding companies by the Federal Reserve,
used to identify institutions in regulatory reports, such as the Call Report and Y9-C. ABA routing numbers are
identifiers assigned by the American Bankers Association to federal or state chartered financial institutions eligible to
maintain an account at a Federal Reserve Bank.
16
As described in Section 1, PPP loan approvals through May 31, 2021, amounted to nearly $800 billion.

Federal Reserve Bank of New York  Economic Policy Review 28, no. 1, June 2022 208
The Paycheck Protection Program Liquidity Facility

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Federal Reserve Bank of New York  Economic Policy Review 28, no. 1, June 2022 209
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