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

We examine how strengthened anti-money laundering (AML) enforcement affects the U.S. banking sector. Heightened enforcement disproportionately raises compliance costs for small banks, especially in counties more exposed to money laundering. In these areas, small banks contract while large banks expand, increasing standardized, government-supported, and secured lending. While aggregate county-level credit does not decline differentially, local outcomes improve. Small establishments grow, non-tradable employment and wages rise, and real estate prices increase. The evidence is consistent with a reallocation mechanism in which AML enforcement shifts activity toward large banks, potentially improving intermediation quality through changes in the composition of local financial intermediation.