Small business loan securitization and interstate risk sharing

Do credit risk transfers in general, and loan sales and securitizations in particular, by financial institutions enhance credit availability and financial stability? Or do they allow assets of poor credit quality to spread to unprotected investors, and thus create financial crises and destroy values? In this paper, we contribute to the continuing debate by examining the effect of small business loan securitizations on interstate personal income insurance. Using data of U.S. banks for the period 1995-2008, we find that small business loans securitizations contribute to the smoothening of state personal income volatility, and that this contribution is stronger in states where small businesses play a more important role in the local economy.