The Weight of Compliance: Anti-Money Laundering Enforcement, Bank Composition, and Lending

Abstract

This paper examines the impact of strengthened anti-money laundering (AML) enforcement on the US banking sector. We find that the increased compliance burden on small banks results in a shift in bank composition and lending behavior. Affected regions witness reduced activity by small banks and a significant rise in activity by large banks. Large banks expand lending to small businesses through CRA and SBA programs and to households through secured lending, compensating for the reduced lending by small banks, ultimately maintaining overall credit supply. Additional findings suggest positive economic effects, including increased wages and employment in the non-tradable sector and an increase in the number of small businesses.

Keywords: Money laundering, Financial Institutions, Real economy, Deposits and lending, Financial crime

JEL Classification: G21, G28