The Effect of the Paycheck Protection Program and Financial Reporting Standards on Bank Risk-Taking

This paper examines the consequences of the paycheck protection program (PPP) for bank risk-taking and whether the shift to the current expected credit loss (CECL) model moderates this effect. We find that the extent of a bank’s PPP participation is associated with relatively greater changes in risk...

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Bibliographic Details
Published in:Management science 2022-03, Vol.68 (3), p.2363-2371
Main Authors: Ballew, Hailey B., Nicoletti, Allison, Stuber, Sarah B.
Format: Article
Language:English
Subjects:
accounting standards
Bank loans
Banking industry
Banks
Financial reporting
government stimulus
Risk factors
Risk taking
Small business loans
Stimulus
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Summary:This paper examines the consequences of the paycheck protection program (PPP) for bank risk-taking and whether the shift to the current expected credit loss (CECL) model moderates this effect. We find that the extent of a bank’s PPP participation is associated with relatively greater changes in risk-taking outside of the PPP. We also show that this effect is concentrated in banks that have not early adopted the CECL model and banks with timelier pre-PPP loan loss provisions, suggesting that timelier loan loss recognition constrains risk-taking incentives. Overall, our findings provide insight into the indirect consequences of government stimulus programs administered through banks and the role of accounting in constraining bank risk-taking. This paper was accepted by Suraj Srinivasan, accounting.
ISSN:0025-1909
1526-5501
DOI:10.1287/mnsc.2021.4223