The Spillover Effect of Consolidating Securitization Entities on Small Business Lending

I investigate spillover effects of a new regulation for securitization on supply of small business loans, which are rarely securitized. The regulation requires banks to consolidate securitization entities previously accorded off-balance-sheet treatment and subjects them to full regulatory capital charges. Controlling for local credit demand during within-county-year analyses, I find that banks that bring securitization entities onto books reduce small business lending in comparison to banks that do not consolidate entities but lend to the same market. After consolidations, counties with a greater market share of affected banks receive less total small business credit and experience slower small business growth. The findings highlight potential erosion of the efficacy of the new regulation to hold banks accountable for risk in securitizations and unintended consequences on the supply of non-securitized credit and the broader economy.