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2016 (2)

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Book
Financial Regulation and Government Revenue : The Effects of a Policy Change in Ethiopia
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Year: 2016 Publisher: Washington, D.C. : The World Bank,

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Abstract

Financial regulation affects government revenue whenever it imposes both the mandatory quantity and price of government bonds. This paper studies a banking regulation adopted by the National Bank of Ethiopia in April 2011, which forces all private banks to purchase a fixed negative-yield government bond in proportion to private sector lending. Having access to monthly bank balance sheets, a survey of branch costs and public finances documentation, the effect of the policy on government revenue can be tracked. This is compared to three plausible revenue-generating alternatives: raising funds at competitive rates on international markets; distorting the private lending of the state-owned bank; and raising new deposits through additional branches of the state-owned bank. Three main results emerge: the government revenue gain is moderate (1.5-2.6 percent of the tax revenue); banks comply with the policy and amass more safe assets; banks' profit growth slows without turning negative (from 10 percent to 2 percent).


Book
The Development Impact of Financial Regulation : Evidence from Ethiopia and Antebellum USA
Authors: ---
Year: 2016 Publisher: Washington, D.C. : The World Bank,

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In absence of deposit insurance, underdeveloped financial systems can exhibit a coordination failure between banks, unable to commit on safe asset holding, and depositors, anticipating low deposit repayment in bad states. This paper shows conditions under which a government can solve this failure by imposing safe asset purchases, which boosts deposits by increasing depositor repayment in bad states. In so doing, financial regulation stimulates bank profits if subsequent deposit growth exceeds the intermediation margin decline. As a result, it also promotes loans and branch installation with deposits. Two empirical tests are presented: 1) a regulation change by the National Bank of Ethiopia in 2011; 2) the introduction of bank taxes in Antebellum USA (1800-1861). Analyzing bank balance sheets and long-term branch installation, the regulation effects are isolated exploiting heterogeneity in bank size and policies introduction respectively, and find increases in branches, deposits, loans, and safe assets, with no decline in overall profits.

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