Piercing Through the Haze Did PPP Increase Versus Decrease Bank Efficiency?

Many aspects of the Paycheck Protection Program (PPP) are well-studied, but we focus on an important exception: bank efficiency. Bank efficiency is also well-studied for other topics in banking, but not PPP. Using instrumental variables for identification, we find more intense PPP lending boosted profit efficiency, but decreased cost efficiency, especially for banks in states with severe COVID-19 crisis intensity. We uncover a potential channel for profit efficiency improvements through increased core deposits and lending that raised fee and interest earnings. Additionally, we find a labor-related channel that could explain the decline in bank cost efficiency from PPP involvement. Banks with more intense PPP lending hired more employees significantly increased compensation expenses, whereas no significant effects are found for non-compensation costs. Findings are robust to alternative measures of PPP intensity, falsification tests, and other econometric techniques