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Working Paper

The Development Impact of Financial Regulation : Evidence from Ethiopia and Antebellum USA

EMPLOYMENT BANKING REGULATION DEPOSIT MARKET – DEVELOPMENTS NATIONAL BANKS ECONOMIC GROWTH ACCOUNTING DEPOSITS PEOPLE SMALL BANKS PROPERTY TAX PRIVATE COMMERCIAL BANKS FINANCIAL MANAGEMENT VILLAGE BALANCE-SHEET BANKING INDUSTRY INTEREST LAWS GUARANTEES DEMAND DEPOSITS INDUSTRY BANKING SYSTEM STRATEGIES SAFE ASSETS ENTREPRENEURS BANKING SYSTEMS REVENUES LIQUIDITY RISK WELFARE ENDOWMENTS LOAN BUDGET CONSTRAINTS ENDOWMENT FEE PROJECTS BORROWERS PAYMENTS SAVING LOCAL GOVERNMENT FINANCE INTERNATIONAL BANK RURAL BANKS BANK COMPETITION STATE BANKS SAFETY NETS BANK LENDING PRIVATE SECTOR BANKS PRIVATE SAVINGS PRIVATE BANKING SAVINGS CAPITAL REGULATION MORAL HAZARD COMMERCIAL BANK BIG BANK BANK ASSETS PRIVATE BANKS COLLECTIONS PRODUCTIVITY INTEREST RATES ECONOMETRICS EXTERNALITIES TRANSFERS PAYMENT MARKETS DEBT BARRIERS TO ENTRY FINANCIAL CRISES LOCAL GOVERNMENT CAPITAL REQUIREMENTS PUBLIC FINANCE LAND RIGHTS DEPOSIT INSURANCE BANK LIQUIDITY BANK OF ENGLAND BANKERS LOANS ENTERPRISES FARMERS EQUITIES PENSION FUNDS FINANCIAL SYSTEM REAL ESTATE FINANCE ADMINISTRATIVE COSTS BANK DEPOSITS INFRASTRUCTURE TAXES BANKING SECTOR BANKS GOVERNMENT SECURITIES DEPOSITORS FEDERAL RESERVE SLR BALANCE SHEET GROWTH CAPITAL FEDERAL RESERVE BANK BIG BANKS STUDENT FAMILY CREDIT ACCESS ACCESS TO FINANCE VALUE DEVELOPMENT BANKS BANK GOVERNMENT FINANCE BANKING PANICS CREDIT MACROECONOMICS BANKING LAWS SAFETY NET BOND MARKET HOUSEHOLD REPAYMENT PROPERTY FORMAL ECONOMY PROPERTIES SAFE ASSET FINANCIAL SERVICE PROVIDERS FINANCIAL REGULATION BALANCE SHEET FINANCIAL SERVICE DEPOSIT MOBILIZATION SECURITIES PUBLIC DEBT RURAL BRANCHES GOVERNANCE INSURANCE TAXATION ECONOMIC DEVELOPMENT INTERESTS LAND SOCIAL BANKING SMALL BANK TIME DEPOSITS BANK PROFITS FINANCIAL DEVELOPMENT NATIONAL BANK INVESTMENT FINANCIAL INTERMEDIATION RISK COMMERCIAL BANKS HOUSEHOLDS BALANCE SHEETS FINANCIAL MARKETS BANKING EMPLOYEE COOPERATIVES REVENUE LENDING SAVINGS BANKS FEES FINANCIAL REFORM FREE BANKING OUTREACH ENTREPRENEURSHIP BANK BRANCHES PAYMENT SYSTEMS GOVERNMENTS RESERVE BANK OF NEW ZEALAND LIQUID ASSETS BANK SIZE DEVELOPMENT BANK PRIVATE SECTOR LOANS DEPOSITOR INEQUALITY EMPLOYEES
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World Bank, Washington, DC
Africa | Ethiopia
2016-07-07T22:17:36Z | 2016-07-07T22:17:36Z | 2016-06

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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