The MountainView Guide to Modeling PPP Loans

Impact to Interest Rate Risk Outcomes

In March 2020, The Coronavirus Aid, Relief, and Economic Stability Act (CARES) allocated $349 billion to the Paycheck Protection Program (PPP) to help fund small businesses with the goal of preventing job loss and failures. Less than a month later Congress increased the program by $310 billion. The program allows for 100% forgiveness of the loans as long as they are used for specific purposes, including expenses such as rent and payroll.

In the aftermath of the program, financial institutions find themselves with inflated balance sheets due to the surge of PPP loans, with uncertainty surrounding terms, forgiveness rates and timing. Meanwhile, consumer stimulus payments and a flight to cash amid the economic volatility are also augmenting balance sheets.

How should institutions think about the ALM modeling of PPP loans to effectively manage the impact on earnings forecasts and interest rate risk?

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