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Financial Regulation and Government Revenue: The Effects of a Policy Change in Ethiopia

Nicola Limodio and Francesco Strobbe

No 1880, BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy

Abstract: Financial regulation can generate government revenue by imposing the quantity and price of government bonds. We study an unexpected banking regulation introduced in 2011 by the Ethiopian Central Bank, forcing commercial banks to purchase a negative-yield government bond. High-frequency bank data and public finances documentation allow tracking the subsequent government revenue gain. This policy is compared to three alternatives: raising funds competitively on international markets; distorting the state- owned bank lending; and raising deposits through state-owned bank branches. Our results suggest that the revenue gain is moderate (1.5-2.6% of tax revenue); banks amass more bonds; their profitability slows without turning negative (from 10% to 2%).

Keywords: Financial Regulation; Government Revenue; Bank Taxes; Banks; Ethiopia (search for similar items in EconPapers)
JEL-codes: G38 H20 H25 G21 O55 (search for similar items in EconPapers)
Date: 2018
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