Financial Regulation and Government Revenue

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).

Bibliographic Details

Main Authors:	Limodio, Nicola, Strobbe, Francesco
Format:	Working Paper biblioteca
Language:	English en_US
Published:	World Bank, Washington, DC 2016-06
Subjects:	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,
Online Access:	http://documents.worldbank.org/curated/en/2016/06/26533231/financial-regulation-government-revenue-effects-policy-change-ethiopia https://hdl.handle.net/10986/24650
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