Abstract
Do banks enable crime? Does regulation insulate finance from criminal activity? I address these questions using evidence from the drug trade in Mexico, finding that local drug cartel activity causes an increase in bank deposits. Accordingly, branch networks grow in affected areas; this growth is not driven by increased lending opportunities. After the election of a “law-and-order” government, these effects dissipate, with liquidity flowing into branches of U.S. banks along the border. I interpret this as evidence that “finance follows crime” in weak institutional environments, and that, absent transnational policy coordination, regulatory arbitrage via cross-border liquidity flows undermines banking regulation.
Abstract
In this paper, I explore how banks develop relationships with criminal organizations, exploiting spatial variation in drug-cartel activity. I use Mexico, where local banking markets have been differentially exposed to drug-cartel market structures, as an empirical laboratory. I test whether banks with pre-existing exposure to specific cartels receive excess liquidity flows after said cartels enter the local banking market. I also test whether cartel entry follows the presence of banks with which a cartel has interacted in the past. This analysis deepens the understanding of bank interactions with the illicit sector, and the role of banking relationships in this process.
(with Walter D’Lima, Tom Schneider, Phil Strahan, and Jun Yang)
Abstract
In this paper, we investigate how government mandates on lending in low-income neighborhoods affect mortgage-credit supply. In particular, we test if banks constrained by the Community Reinvestment Act (CRA) increase credit supply in response to declines in credit demand. The motivation behind this hypothesis is that the CRA imposes costs on banks related not to their supply of credit, but to the equilibrium quantity of credit in low-income neighborhoods. As an instrument, we use a planned service disruption to the NYC mass-transit system, which produces a large exogenous change in real estate amenities –and hence in the demand for housing.