A study from two Federal Reserve economists has found that states hardest-hit by the coronavirus pandemic are being approved for payroll protection loans by the Small Business Administration at lower rates than less hard-hit areas.

The study, from Haoyang Liu and Desi Volker of the Federal Reserve Bank of New York’s Research and Statistics Group, said 20% of small businesses in New York were approved for Paycheck Protection loans, compared with more than 55% of small businesses in Nebraska.

The economists used the number of coronavirus cases as a proxy for the economic impact of the pandemic in a specific state. They said the payment protection loans have not been correlated to unemployment claims.

“The economic impact of COVID-19, both measured by the number of COVID-19 cases per capita and by the number of initial unemployment claims per capita, does not explain the geographical distribution of PPP loans,” Liu and Volker said. “In contrast, we find that lenders’ preference for borrowers with an existing relationship and the market share of community banks are the main factors explaining the geographical variation in PPP funding.”

The economists said there was actually a negative correlation between COVID-19 cases per capita and the share of small firms getting PPP funding. This correlation was not statistically significant, they said, if New York and New Jersey were excluded.

The CARES Act provided $2.2 trillion in emergency funding, with nearly $350 billion in relief loans to small businesses, but the controversy around the program has prompted high-profile recipients to return loans.

Liu and Volker said instead there is a correlation between a state’s percentage of small businesses that received bank financing in 2019 and the proportion of small businesses receiving PPP loans, suggesting banks are prioritizing preexisting customers.

In a statement, SBA Administrator Jovita Carranza and Treasury Secretary Steven Mnuchin said the second round of PPP funding has been more effective in reaching small businesses.

The initial $349 billion appropriated for the PPP was exhausted in just two weeks. Round two of the SBA’s PPP is currently underway, with another $176 billion approved through May 1, according to Keefe, Bruyette & Woods (KBW).

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