While marijuana businesses often struggle to find banks that are willing to take them on as clients due to risks caused by the ongoing federal prohibition of cannabis, a new study found that banking activity actually increases in states that legalize marijuana.<\/p>\n
The research doesn\u2019t make a direct connection between state-level marijuana reform and the increased activity, but it does strongly imply that there\u2019s a relationship\u2014even if the factors behind the trend aren\u2019t exactly clear.<\/p>\n
Researchers set out to investigate banking trends in states that have legalized cannabis, looking at bank regulatory filings with the Federal Deposit Insurance Corporation (FDIC) from 2011 to 2016. They found evidence that \u201cbanking activity (deposits and subsequent loans) increase considerably in legalizing states relative to non-legalizing states.\u201d<\/p>\n
That\u2019s in spite of the fact that banks and credit unions run the risk of being penalized by federal regulators for working with businesses that deal with a federally controlled substance.<\/p>\n
\u201cWhile uncertainty can result in overly cautious behavior and hinder economic activity, we do not find evidence of this with cannabis laws and the banking industry,\u201d the authors wrote in the new paper\u2014titled, \u201cTHC and the FDIC: Implications of Cannabis Legalization for the Banking System.\u201d<\/p>\n
The study analyzed data from \u201c150,566 bank-quarter observations from 6,932 unique banks located in 46 different states.\u201d It found that deposits increased by an average range of 3.14-4.33 percent\u2014and bank lending increased by 6.54-8.62 percent\u2014post-legalization.<\/p>\n
\n\u201cOur results indicate that deposits and loans increased for banks after recreational cannabis legalization.\u201d<\/p>\n<\/blockquote>\n
Of course, it makes sense that legal states would see increased financial activity in the banking sector after opening a new market, even if only some banks choose to take the risk of working directly with cannabis businesses. The emerging marijuana industry also supports an array of ancillary firms and traditional companies that provide services to dispensaries and grow operations.<\/p>\n
As of June 30, there were 706 financial institutions that had filed requisite reports saying they were actively serving cannabis clients<\/a>. Thats\u00a0up from 689 in the previous quarter<\/a>\u00a0but still down from a peak of 747 in late 2019.<\/p>\n
But the question remains: why are some banks deciding to take on marijuana clients while others remain wary of federal repercussions?<\/p>\n
The study authors\u2014from the University of Arizona, Drexel University, San Diego State University and Scripps College\u2014put forward two possibilities about why \u201cthe risk from regulatory uncertainty did not decrease banks\u2019 willingness to accept deposits or make loans.\u201d<\/p>\n
The increase \u201cmay suggest that banks were either unconcerned about the potential risk associated with accepting cannabis related deposits or optimistic about the chances that regulations will adapt to the needs of legalizing states,\u201d the paper<\/a> reasons.<\/p>\n
Confidence about working with a federally illegal industry may well have been bolstered in 2014 when the Financial Crimes Enforcement Network (FinCEN) under the Obama administration issued guidance to financial institutions on reporting requirements for cannabis-related businesses.<\/p>\n
The second option, optimism about federal reform, also seems possible. It was around the time that the bipartisan Secure and Fair Enforcement (SAFE) Banking Act was first introduced that there was a notable spike in financial institutions reporting that they have marijuana business clients.<\/p>\n
In the years since, that legislation has been approved in some form five times<\/a> in the U.S. House of Representatives, but it\u2019s continued to stall in the Senate. In general, banks reporting marijuana accounts has remained relatively stable since 2019.<\/p>\n
\u201cAlthough many have speculated about the increased legal risks to banks, there is a lack of evidence for instances where banks are criminally prosecuted or lose their federally insured status,\u201d the study states. \u201cIf these negative repercussions rarely happen, it makes sense that banks would not respond to the legislative uncertainty.\u201d<\/p>\n
\u201cAs more state regulators issue statements in support of banks and credit unions serving the cannabis industry, the financial institutions can become more optimistic about the chances that regulations will adapt in their favor with time,\u201d the authors wrote.<\/p>\n
Despite optimism for future reform that certain lawmakers have expressed<\/a>, it doesn\u2019t necessarily take the sting out of the latest failed attempt to secure protections for banks that choose to work with state-legal cannabis businesses as part of a large-scale defense bill.<\/p>\n
A pro-reform Republican senator recently slammed Democrats for failing to advance marijuana banking reform<\/a> despite having a congressional majority and control of the presidency.<\/p>\n
For what it\u2019s worth, the secretary of the U.S. Treasury Department recently said that freeing up banks to work with state-legal marijuana businesses<\/a> would \u201cof course\u201d make the Internal Revenue Service\u2019s (IRS) job of collecting taxes easier.<\/p>\n
With respect to the SAFE Banking Act, a bipartisan coalition of two dozen governors recently implored congressional leaders to\u00a0finally enact marijuana banking reform<\/a>\u00a0through the large-scale defense legislation.<\/p>\n
A group of small marijuana business owners also recently made the case that the incremental banking policy change\u00a0could actually help support social equity efforts<\/a>.<\/p>\n
Rodney Hood, a board member of the National Credit Union Administration,\u00a0wrote in a recent Marijuana Moment op-ed<\/a>\u00a0that legalization is an inevitability\u2014and it makes the most sense for government agencies to get ahead of the policy change to resolve banking complications now.<\/p>\n
\nRhode Island Governor Includes Marijuana Legalization And Expungements In Budget Request<\/a><\/p>\n<\/blockquote>\n\n
The post Banking Activity Increases In States That Legalize Marijuana, Study Finds<\/a> appeared first on Marijuana Moment<\/a>.<\/p>\n
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