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Financial regulation and government revenue : the effects of a policy change in Ethiopia (English)

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).

Details

  • Author

    Limodio,Nicola, Strobbe,Francesco

  • Document Date

    2016/06/28

  • Document Type

    Policy Research Working Paper

  • Report Number

    WPS7733

  • Volume No

    1

  • Total Volume(s)

    1

  • Country

    Ethiopia,

  • Region

    Africa,

  • Disclosure Date

    2016/06/28

  • Disclosure Status

    Disclosed

  • Doc Name

    Financial regulation and government revenue : the effects of a policy change in Ethiopia

  • Keywords

    finance and markets;Federal Democratic Republic of Ethiopia;government revenue;private sector lending;finance and economic;safe asset;government bond;reserve requirement;domestic interest rate;private sector bank;global financial market;department of economics;number of banks;private commercial bank;international capital market;public debt reduction;demand for money;average total cost;average interest rate;amount of saving;allocation of capital;international debt crisis;local labor market;total tax revenue;repair and maintenance;water and electricity;bank balance sheet;electronic data processing;interest rate range;growth and development;risk of insolvency;private lending;regulation policy;0 hypothesis;standard deviation;private bank;average cost;standard error;banking system;macroprudential regulation;financial repression;banking sector;sovereign rating;bond purchase;international market;large bank;alternative revenue;revenue calculation;treasury bill;asset allocation;empirical evidence;lending rate;previous subsection;raise revenues;upper bind;deposit mobilization;government saving;variable cost;utility bill;rural transportation infrastructure;historical data;running cost;geographic disparities;financial restraint;domestic saving;bank executives;Political Economy;financial deepening;building tax;term debt;bond price;debt sale;account holder;sovereign debt;aggregate economy;advanced economy;alternative scenarios;government intervention;budgetary pressure;liquid cash;liquid asset;regression model;point estimate;loan disbursement;behavioral response;real value;banking industry;local bank;bank safety;welfare analysis;research assistance;branch infrastructure;national account;state control;reserve ratio;direct taxation;government expenditure;asian countries;theoretical model;empirical analysis;Learning and Innovation Credit;university press;sovereign default;open economy;nominal rate;bank behavior;net return;bond issue;short notice;domestic investment;household preference;systemic risk;centralized economy;state-owned banks;deposit rate;descriptive approach;seigniorage revenue;open access;development policy;public finance;Banking Regulation;competitive rate;raise funds;average returns;international bond;counterfactual analysis;price index;sovereign bond;debt restructuring;operational expense;

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Citation

Limodio,Nicola Strobbe,Francesco

Financial regulation and government revenue : the effects of a policy change in Ethiopia (English). Policy Research working paper,no. WPS 7733 Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/900661467128974424/Financial-regulation-and-government-revenue-the-effects-of-a-policy-change-in-Ethiopia