Date on Honors Thesis

Spring 5-12-2023

Abstract/Description

Drug trafficking is on the rise in America. Drug trafficking brings money laundering, and banks have to combat this with Anti-Money laundering (AML) policies from the Bank Secrecy act. This is combated by the High-Intensity-Drug-Trafficking Area (HIDTA) designation. The designation aims at providing support to local, state, and federal law enforcement to combat drug trafficking in these counties. HIDTA and banks are not connected. Rather I use the HIDTA designation as a proxy to clearly identify counties that have drug trafficking. I specifically focused on small and community banks in rural areas. Small and community banks are disproportionately affected by AML policies compared to larger banks due to larger banks being able to employ economies of scale. Larger banks are able to spread the compliance costs over their network of branches, while a small bank might only have a couple of branches across their local areas. To find this, I found counties based on the census definition of mostly rural, mostly urban, and completely rural. I then used bank deposit information as a proxy for financial health of the bank. I ran regressions, and found that there is a statistical significance that HIDTA does hurt bank deposits in a county. I found that these HIDTA designation hurts bank deposits more in completely rural areas compared to mostly rural and urban counties. Most importantly, I found that when a county started as HIDTA and then was later removed as a HIDTA county, signaling there was no need for HIDTA and it was successful at reducing drug trafficking in the area, median deposits increased. This supports the hypothesis that the elimination of HIDTA designation will positively influence banking behavior.

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