Essays in Banking and Crime

Abstract

This dissertation consists of two essays which explore the interface between retail banks and organized criminality. In the first of these, “Dark Banking? Banks and Illicit Financial Flows from the Mexican Drug Trade,” I explore why banks provide financial services to organized-crime syndicates. I also ask whether there is a role for regulation in insulating 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, and branch networks grow in affected areas. After the election of a “law-and-order” government, these effects dissipate, with liquidity flowing into branches of U.S. banks along the border. In the second essay, “Bank Branch Networks, Banking Relationships, and Organized Crime,” I explore if banks develop relationships with criminal organizations, exploiting spatial variation in cartel activity, again using Mexico as an empirical laboratory. I test whether banks with prior exposure to criminal activity are more likely to enter areas where cartels operate, as well as whether previous exposure to specific cartels predicts entry into banking markets where said cartels have entered. Results suggest that certain banks do establish these relationships. Bank characteristics that have significant effects on differential behavior regarding collusion with organized criminal organizations are domestic majority equity ownership and bank size.