Liquidity Requirements, Bank Deposits and Financial Development

Nicola Limodio and Francesco Strobbe

Economica, 2023, vol. 90, issue 357, 240-270

Abstract: In the presence of low trust in the banking system, liquidity requirements can stimulate bank deposits and financial development by enhancing depositor repayment in bad states. We study an unannounced and unexpected policy that increased the liquid assets of Ethiopian banks by 33% in one quarter of 2011, and present three findings consistent with this hypothesis. First, a panel of depositors shows deposit growth among wealthy individuals. Second, a survey reports higher bank deposits in branches opened after the policy in high‐income cities. Third, bank balance sheets and two sources of bank exposure highlight an increase in deposits, loans and branches.

Date: 2023
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