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Working Paper

Financial Regulation and Government Revenue : The Effects of a Policy Change in Ethiopia

AUCTION GOVERNMENT SAVINGS BANKING REGULATION DEPOSIT CAPITAL MARKETS HOLDING LIABILITY EQUIPMENT ACCOUNTING DEPOSITS PRIVATE COMMERCIAL BANKS LIQUIDATION BOND PRICE FINANCIAL DEEPENING INTERNATIONAL CAPITAL PUBLIC DEBTS STOCK PRIVATE LENDING VALUATION RETURN ON EQUITY BANKING INDUSTRY INTEREST DEBT CRISIS INDUSTRY VARIABLE COST INTEREST RATE EXCHANGE BANKING SYSTEM RESERVE REQUIREMENTS LIQUIDITY INTERNATIONAL FINANCIAL MARKETS SERVICES DEBTOR POLITICAL ECONOMY INTERNATIONAL CAPITAL MARKETS BONDS DOMESTIC INTEREST RATES DEBT OVERHANGS LOAN BORROWERS BRANCH INFRASTRUCTURE TAX INCOME TAX GOVERNMENT BOND SOVEREIGN DEFAULT LIABILITY COMPOSITION DUMMY VARIABLE RESERVE INTERNATIONAL BANK REVENUE SOURCES BUDGET CENTRAL BANK PRIVATE SECTOR BANKS LABOR MARKET SAVINGS ALLOCATION OF CAPITAL LOCAL BANKS CURRENCY DOMESTIC CURRENCY BANK BEHAVIOR COMMERCIAL BANK ASSET HOLDING TRANSPORT DEBTS PERSONAL INCOME FINANCES PRIVATE BANKS DEBT OUTSTANDING INTEREST RATES EXTERNALITIES MONETARY FUND MARKETS DEBT SOVEREIGN RATING RETURN OPEN ECONOMY INTERNATIONAL DEBT DOMESTIC DEBT INTERNATIONAL BONDS DOLLAR DEBT LOANS LABOR INTERNATIONAL DEBT CRISIS RESERVES RESERVE REQUIREMENT FINANCE BANK DEPOSITS INFRASTRUCTURE TAXES BANKING SECTOR BANKS EXPENDITURE AUCTIONS EQUITY INVESTORS SOVEREIGN DEBT INTEREST PAYMENTS SYSTEMIC RISK DEBT REDUCTION WAGES VALUE BANK GOVERNMENT FINANCE RETURNS CREDIT TREASURY BILLS MACROECONOMICS GOVERNMENT EXPENDITURE INTEREST PAYMENT BANK BALANCE SHEETS GOVERNMENT REVENUE DISBURSEMENTS CAPITAL FLOWS DEBTOR REPORTING SYSTEM FINANCIAL REGULATION BALANCE SHEET MARKET DEFAULT T-BILLS DEPOSIT MOBILIZATION PUBLIC DEBT TREASURY INSURANCE TAXATION GOVERNMENT DEBT GOVERNMENT POLICIES ECONOMIC DEVELOPMENT GOVERNMENT BONDS LAND RESERVE RATIOS SECURITY INTEREST ARREARS NATIONAL BANK INVESTMENT RISK RETURNS ON EQUITY BOND COMMERCIAL BANKS SOVEREIGN BONDS BALANCE SHEETS PUBLIC FINANCES DEBT RESTRUCTURING FINANCIAL MARKETS BANKING CIT NET LOSS REVENUE PROFIT LENDING CHECK LIQUID CASH PROFITS LIABILITIES GOVERNMENTS ARREARS BANK HOLDING LIQUID ASSETS INTERNATIONAL MARKETS DEVELOPMENT BANK ACCOUNT HOLDERS GOVERNMENT INTERVENTION
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World Bank, Washington, DC
Africa | Ethiopia
2016-07-07T22:17:35Z | 2016-07-07T22:17:35Z | 2016-06

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).

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