Bank Deposits and Liquidity Regulation: Evidence from Ethiopia

Nicola Limodio and Francesco Strobbe

No 612, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

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

Date: 2017
New Economics Papers: this item is included in nep-ban and nep-cba
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