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Central Bank Intervention and Bank Liquidity: Evidence from the Paycheck Protection Program

Author

Listed:
  • Parush Arora

    (Ashoka University)

  • Derek Tran

    (Economist, Amazon.com Inc.)

Abstract

This paper uses loan-level transactions from the Paycheck Protection Program (PPP) to understand how a bank’s decision to borrow funds from the discount window (DW) affected its lending behavior during the COVID-19 crisis. Implementation of the PPP can be seen as an exogenous shock to the liquidity demand for banks, independent of their financial conditions. By exploiting this independence, we find a causal relationship between use of DW and the number of PPP loans extended by large banks but not small banks. While both types used the DW in the absence of a long-term funding source, usage of the DW almost doubled PPP lending for large banks. After the establishment of a long-term funding source, however, this effect was reduced to 69% due to substitution away from the DW. These findings suggest that in the presence of an unexpected liquidity shock, the DW plays a critical role in extending short-term liquidity to the banking sector.

Suggested Citation

  • Parush Arora & Derek Tran, 2024. "Central Bank Intervention and Bank Liquidity: Evidence from the Paycheck Protection Program," Working Papers 132, Ashoka University, Department of Economics.
    • Handle: RePEc:ash:wpaper:132
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    File URL: https://dp.ashoka.edu.in/ash/wpaper/paper132_0.pdf
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