The impact of the PPP on the US banking industry

ByHanover Team
Posting date: 03 February 2021

When the US government signed a new bill in March 2020, it included a second stimulus package for small businesses which featured a new loan program, known as the Paycheck Protection Program – and it marked a major shift in the banking and financial services industry. The PPP loans were designed to support small businesses and their workforce during the economic downturn. While the PPP provides $349 billion to support loans to small businesses that would otherwise be eligible for the SBA loans, concerns have been raised over the effectiveness of this program.


Since January 2020, businesses that were given a PPP loan have been able to apply for the second round. With many businesses needing help with operational costs, the PPP has enabled small business owners to sustain cash flow and remain competitive in what is currently a volatile market. However, PPP loans have proven to be a real challenge for US banking firms. There’s now an unprecedented level of risk exposure. Banks have been forced to become more agile and ensure effective management of PPP-related risks, not to mention there’s likely to be further regulatory scrutiny in the future. So, how can banking firms overcome these hurdles?


Tackling the challenges


In a time of great need, many banks have felt obliged to come to the nation’s aid and help small businesses stay afloat in a period of uncertainty. The PPP loans, however, have come at a great cost for many banking firms. For example, banks of all sizes are susceptible to PPP-related fraud and therefore must implement more secure systems to mitigate and prevent fraud. It’s important that banks carefully analyze their PPP loan approval process to ensure all applicants are put through proper risk management. 


When applying for the second round of loans, businesses must be able to prove they experienced a 25% decrease in gross revenue in the first three quarters of 2020, compared to the previous year. Then there’s the challenge of calculating the right amount of funds for a business, with thorough reporting of borrowers from the bank. Banking firms must make system reporting a priority to prepare for fraud attacks, especially given that regulators will likely closely observe PPP applications.


Keeping up with the demands of the PPP


The PPP presents a range of regulatory risks for banks, such as fair lending risk, loan prioritization and compliance risks. Due to the global crisis, banks had little time to prepare a process for approving loans applications, causing concerns over fair lending. This has led to banks receiving scrutiny on the treatment of new customers. When it comes to PPP loans, many banks have focused primarily on existing customers for reasons such as to maintain efficiency and to manage the large volume of applications. 


In doing so, many banks haven’t provided equal attention to new customers signing up for the loans, which could be perceived as discrimination against small businesses in the interest of building on existing revenue through favoritism. As a result, the PPP loans have had a profound impact on many banks’ fair lending risk profile, which means firms are having to grapple with more and more compliance concerns. Given the demands of the PPP, banking firms must carefully document the fair lending process and focus on using analytics tools to ensure complete accuracy.


How can banking firms thrive in our new economy?


Under the new PPP loans, banking firms are now competing against other banks to manage the ongoing wave of loan applications. It’s more important than ever that banks accelerate innovation and take advantage of new digital tools to help service small businesses. With the challenges that come from the PPP, banks should take the time to reflect and implement a more streamlined approach to investment. Furthermore, banking firms need to develop their current employees and improve the hiring process at all levels to make sure they have the personnel who can handle the dramatic changes in the banking industry. The PPP may not define the future of the banking industry, but it’s certainly having an adverse impact that will require banks to act fast and introduce new strategies to overcome the ripple effects.


Hanover has the expertise to help your business


The US banking industry is changing at a rapid rate. It’s important that banking firms adapt, focus on new technologies, and recruit the right professionals to power their operations. At Hanover, we have years of experience and expertise in the banking and private wealth management markets. Our executive search team deliver in-depth, exhaustive leadership solutions and market intelligence services. 


We support each of our clients with a tailored service and we have an outstanding track record of building strong relationships. If you’re looking to recruit into the banking sector, contact us today for more information.


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