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Bank Deposits and Liquidity Regulation: Evidence from Ethiopia

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  • Nicola Limodio
  • Francesco Strobbe

Abstract

The regulation of bank liquidity can create a commitment device on repaying depositors in bad states, if deposit insurance is absent. A theoretical model shows that liquidity regulation can: 1) stimulate a deposit in flow, moderating the limited liability inefficiency; 2) promote lending and branching, if deposit growth exceeds the intermediation margin decline. Our empirical test exploits an unexpected policy change, which fostered the liquid assets of Ethiopian banks by 25% in 2011. Exploiting the cross-sectional heterogeneity in bank size and bank-level databases, we find an increase in deposits, loans and branches, with no decline in profits. JEL code: G21, G32, O16, O55 Keywords: Banking, Liquidity Risk, Financial Development, Ethiopia

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  • Nicola Limodio & Francesco Strobbe, 2017. "Bank Deposits and Liquidity Regulation: Evidence from Ethiopia," Working Papers 612, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    • Handle: RePEc:igi:igierp:612
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    Cited by:

    1. Angelo D'Andrea & Nicola Limodio, 2019. "High-Speed Internet, Financial Technology and Banking in Africa," BAFFI CAREFIN Working Papers 19124, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    2. Limodio,Nicola & Strobbe,Francesco, 2016. "Financial regulation and government revenue : the effects of a policy change in Ethiopia," Policy Research Working Paper Series 7733, The World Bank.

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    More about this item

    Keywords

    banking; liquidity risk; financial development; ethiopia;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O55 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Africa

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