Publication:
The Development Impact of Financial Regulation: Evidence from Ethiopia and Antebellum USA

Loading...
Thumbnail Image
Files in English
English PDF (2.49 MB)
448 downloads
English Text (179.5 KB)
114 downloads
Date
2016-06
ISSN
Published
2016-06
Editor(s)
Abstract
In absence of deposit insurance, underdeveloped financial systems can exhibit a coordination failure between banks, unable to commit on safe asset holding, and depositors, anticipating low deposit repayment in bad states. This paper shows conditions under which a government can solve this failure by imposing safe asset purchases, which boosts deposits by increasing depositor repayment in bad states. In so doing, financial regulation stimulates bank profits if subsequent deposit growth exceeds the intermediation margin decline. As a result, it also promotes loans and branch installation with deposits. Two empirical tests are presented: 1) a regulation change by the National Bank of Ethiopia in 2011; 2) the introduction of bank taxes in Antebellum USA (1800-1861). Analyzing bank balance sheets and long-term branch installation, the regulation effects are isolated exploiting heterogeneity in bank size and policies introduction respectively, and find increases in branches, deposits, loans, and safe assets, with no decline in overall profits.
Link to Data Set
Citation
Limodio, Nicola; Strobbe, Francesco. 2016. The Development Impact of Financial Regulation: Evidence from Ethiopia and Antebellum USA. Policy Research Working Paper;No. 7734. © World Bank. http://hdl.handle.net/10986/24651 License: CC BY 3.0 IGO.
Associated URLs
Associated content
Report Series
Report Series
Other publications in this report series
  • Publication
    Intergenerational Income Mobility around the World
    (Washington, DC: World Bank, 2025-07-09) Munoz, Ercio; Van der Weide, Roy
    This paper introduces a new global database with estimates of intergenerational income mobility for 87 countries, covering 84 percent of the world’s population. This marks a notable expansion of the cross-country evidence base on income mobility, particularly among low- and middle-income countries. The estimates indicate that the negative association between income mobility and inequality (known as the Great Gatsby Curve) continues to hold across this wider range of countries. The database also reveals a positive association between income mobility and national income per capita, suggesting that countries achieve higher levels of intergenerational mobility as they grow richer.
  • Publication
    The Impact of Trade Promotion Organizations on Exports
    (Washington, DC: World Bank, 2025-08-13) Choi, Yewon; Fernandes, Ana Margarida; Grover, Arti; Iacovone, Leonardo; Olarreaga, Marcelo
    This paper examines the impact of trade promotion organizations on exports during the COVID-19 pandemic using a World Bank survey. The results suggest that increased trade promotion organization budgets significantly boosted exports during downturns but had no effect during the recovery phase. Interestingly, e-commerce programs adopted by trade promotion organizations negatively affected exports during downturns as they diverted resources away from productive support, especially for sectors not intensive in online trade. These findings suggest that countercyclical trade promotion organizations budgets may enhance trade resilience during similar global shocks.
  • Publication
    The Future of Poverty
    (Washington, DC: World Bank, 2025-07-15) Fajardo-Gonzalez, Johanna; Nguyen, Minh C.; Corral, Paul
    Climate change is increasingly acknowledged as a critical issue with far-reaching socioeconomic implications that extend well beyond environmental concerns. Among the most pressing challenges is its impact on global poverty. This paper projects the potential impacts of unmitigated climate change on global poverty rates between 2023 and 2050. Building on a study that provided a detailed analysis of how temperature changes affect economic productivity, this paper integrates those findings with binned data from 217 countries, sourced from the World Bank’s Poverty and Inequality Platform. By simulating poverty rates and the number of poor under two climate change scenarios, the paper uncovers some alarming trends. One of the primary findings is that the number of people living in extreme poverty worldwide could be nearly doubled due to climate change. In all scenarios, Sub-Saharan Africa is projected to bear the brunt, contributing the largest number of poor people, with estimates ranging between 40.5 million and 73.5 million by 2050. Another significant finding is the disproportionate impact of inequality on poverty. Even small increases in inequality can lead to substantial rises in poverty levels. For instance, if every country’s Gini coefficient increases by just 1 percent between 2022 and 2050, an additional 8.8 million people could be pushed below the international poverty line by 2050. In a more extreme scenario, where every country’s Gini coefficient increases by 10 percent between 2022 and 2050, the number of people falling into poverty could rise by an additional 148.8 million relative to the baseline scenario. These findings underscore the urgent need for comprehensive climate policies that not only mitigate environmental impacts but also address socioeconomic vulnerabilities.
  • Publication
    The Macroeconomic Implications of Climate Change Impacts and Adaptation Options
    (Washington, DC: World Bank, 2025-05-29) Abalo, Kodzovi; Boehlert, Brent; Bui, Thanh; Burns, Andrew; Castillo, Diego; Chewpreecha, Unnada; Haider, Alexander; Hallegatte, Stephane; Jooste, Charl; McIsaac, Florent; Ruberl, Heather; Smet, Kim; Strzepek, Ken
    Estimating the macroeconomic implications of climate change impacts and adaptation options is a topic of intense research. This paper presents a framework in the World Bank's macrostructural model to assess climate-related damages. This approach has been used in many Country Climate and Development Reports, a World Bank diagnostic that identifies priorities to ensure continued development in spite of climate change and climate policy objectives. The methodology captures a set of impact channels through which climate change affects the economy by (1) connecting a set of biophysical models to the macroeconomic model and (2) exploring a set of development and climate scenarios. The paper summarizes the results for five countries, highlighting the sources and magnitudes of their vulnerability --- with estimated gross domestic product losses in 2050 exceeding 10 percent of gross domestic product in some countries and scenarios, although only a small set of impact channels is included. The paper also presents estimates of the macroeconomic gains from sector-level adaptation interventions, considering their upfront costs and avoided climate impacts and finding significant net gross domestic product gains from adaptation opportunities identified in the Country Climate and Development Reports. Finally, the paper discusses the limits of current modeling approaches, and their complementarity with empirical approaches based on historical data series. The integrated modeling approach proposed in this paper can inform policymakers as they make proactive decisions on climate change adaptation and resilience.
  • Publication
    Climate Vulnerability and Job Accessibility
    (Washington, DC: World Bank, 2025-08-11) Iimi, Atsushi
    Many developing cities are facing rapid population growth and extreme climate events. This paper examines the link between job accessibility and climate vulnerability, using data from Antananarivo, Madagascar, which frequently experiences flooding. As in other countries, the analysis finds that men’s commutes are longer than women’s, who tend to walk to work or use public transport. Even after controlling for observables and the potential endogeneity bias associated with commute time, the findings show that climate vulnerability negatively impacts wages, as people avoid commuting long to work due to anticipated potential climate risks. Building climate resilience into urban transport is therefore essential. As predicted by theory, the evidence also shows that the value of commuting is positive, and walking is disadvantageous. Motorized commuting yields higher returns, which could lead to overuse of private cars and taxis, posing decarbonization challenges.
Journal
Journal Volume
Journal Issue

Related items

Showing items related by metadata.

  • Publication
    Simple Tools to Assist in the Resolution of Troubled Banks
    (World Bank, Washington, DC, 2012-01) McGuire, Claire L.
    This toolkit is designed to assist authorities in resolving troubled banks. It provides generic forms that can be adapted for use in planning supervisory actions or implementing resolution processes. This toolkit contains forms that are generic and will need to be tailored to the particular country laws and circumstances. The toolkit also contains a least cost or lesser cost model and explanatory guide that provide diagnostic tools to assist authorities in estimating the costs of various resolution methods. The least cost or lesser cost model can also be used to value various assets that may be offered for sale as part of the resolution process. In some circumstances, the decision will be made to liquidate a bank at the end of a long period of utilizing other supervisory tools to try to rehabilitate the bank, thereby providing the authorities with adequate time to gather information about the problem bank and prepare a plan for its closure. In other circumstances, the authorities will have little time to plan for a bank's closing and will have to rely on their general crisis preparedness tools to handle the resolution process as efficiently as possible. Whichever circumstances are present, planning for bank resolution should be part of a country's overall strategy for its financial sector.
  • Publication
    Republic of Korea Financial Sector Assessment Program Technical Note : Crisis Preparedness and Crisis Management Framework
    (Washington, DC, 2014-12) International Monetary Fund; World Bank
    Korea experienced a financial crisis in the late 1990s, which it overcame successfully. The rich experiences gained in handling past crises have helped in the establishment of a broad crisis management framework in Korea. The successful management of the 1997 financial crisis is reported to have been guided by the following principles: (i) bold and decisive measures are required to regain market confidence, rather than incremental ones; (ii) though Government will take the lead in crisis management initiatives, private capital should be encouraged to fully participate in the process; (iii) bank recapitalization and creation of a bad bank are not mutually exclusive options; the crisis management measures should be politically acceptable and have built-in exit strategies with clear time-frames; (iv) moral hazard should be minimized; and (v) all forms of financial protectionism must be rejected. Korea responded to the 2008 global financial crisis with certain policy measures that helped the Korean financial and real sectors to weather the immediate effects of the global crisis. These included policy and financial support to stabilize the money, securities, and bond markets, to extend financial support to corporate and financial entities, and to support small and medium enterprise (SME) and micro finance sectors. The authorities introduced a series of measures to contain the stress in Mutual Savings Banks (MSBs) during 2011 and 2012 and turned them around. The stress in MSBs was largely due to an extensive industry-wide exposure to troubled real estate project financing as well as shareholder and management misconduct.4 Faced with sector-wide stress and declining depositor confidence the financial sector regulatory agencies jointly announced new mitigating measures for the MSB sector.
  • Publication
    Bank Bailouts, Competition, and the Disparate Effects for Borrower and Depositor Welfare
    (World Bank, Washington, D.C., 2013-04) Calderon, Cesar; Schaeck, Klaus
    This paper investigates how government interventions into banking systems such as blanket guarantees, liquidity support, recapitalizations, and nationalizations affect banking competition. This debate is important because the pricing of banking products has implications for borrower and depositor welfare. Exploiting data for 124 countries that witnessed different policy responses to 41 banking crises, and using difference-in-difference estimations, the paper presents the following key results: (i) Government interventions reduce Lerner indices and net interest margins. This effect is robust to a battery of falsification and placebo tests, and the competitive response also cannot be explained by alternative forces. The competition-increasing effect on Lerner indices and net interest margins is also confirmed once the non-random assignment of interventions is accounted for using instrumental variable techniques that exploit exogenous variation in the electoral cycle and in the design of the regulatory architecture across countries. (ii) Consistent with theoretical predictions, the competition-increasing effect of government interventions is greater in more concentrated and less contestable banking sectors, but the effects are mitigated in more transparent banking systems. (iii) The competitive effects are economically substantial, remain in place for at least 5 years, and the interventions also coincide with an increase in zombie banks. The results therefore offer direct evidence of the mechanism by which government interventions contribute to banks' risk-shifting behavior as reported in recent studies on bank level runs via competition. (iv) Government interventions disparately affect bank customers' welfare. While liquidity support, recapitalizations, and nationalizations improve borrower welfare by reducing loan rates, deposit rates decline. The empirical setup allows quantifying these disparate effects.
  • Publication
    Financial Regulation and Government Revenue
    (World Bank, Washington, DC, 2016-06) Limodio, Nicola; Strobbe, Francesco
    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).
  • Publication
    Mozambique : Financial Sector Assessment
    (Washington, DC, 2009-11) World Bank
    Mozambique's overall macroeconomic performance in recent years has been impressive. Macroeconomic stability, a sustained structural reform effort, substantial foreign aid flows and, until recently, a benign international environment has generated an average annual real gross domestic product (GDP) growth rate of 7½ percent for most of the past decade. While inflation has been relatively high (around 10 percent annually) and volatile in recent years, reflecting the predominance of food (52 percent) and energy (23 percent) in the consumer basket, underlying inflationary pressures appear to be contained. As a result, the banking sector's soundness, in particular asset quality, improved substantially. Between end-2003 and 2008, non-performing loans (NPLs) for the system as a whole declined dramatically (from 14.4 to 2.9 percent), largely reflecting the restructuring of problem banks and assets and a supportive macroeconomic environment. This Financial Sector Assessment (FSA) focuses on the key developmental challenges still facing the Mozambican financial sector. Section two provides an assessment of the structure and performance of the banking sector and the main impediments to financial deepening and outreach. Section three presents the state of development and key challenges in the pension and insurance sectors, respectively. Section four assesses the payments system infrastructure.

Users also downloaded

Showing related downloaded files

  • Publication
    Impact Evaluation in Practice, Second Edition
    (Washington, DC: Inter-American Development Bank and World Bank, 2016-09-13) Gertler, Paul J.; Martinez, Sebastian; Premand, Patrick; Rawlings, Laura B.; Vermeersch, Christel M. J.
    The second edition of the Impact Evaluation in Practice handbook is a comprehensive and accessible introduction to impact evaluation for policy makers and development practitioners. First published in 2011, it has been used widely across the development and academic communities. The book incorporates real-world examples to present practical guidelines for designing and implementing impact evaluations. Readers will gain an understanding of impact evaluations and the best ways to use them to design evidence-based policies and programs. The updated version covers the newest techniques for evaluating programs and includes state-of-the-art implementation advice, as well as an expanded set of examples and case studies that draw on recent development challenges. It also includes new material on research ethics and partnerships to conduct impact evaluation. The handbook is divided into four sections: Part One discusses what to evaluate and why; Part Two presents the main impact evaluation methods; Part Three addresses how to manage impact evaluations; Part Four reviews impact evaluation sampling and data collection. Case studies illustrate different applications of impact evaluations. The book links to complementary instructional material available online, including an applied case as well as questions and answers. The updated second edition will be a valuable resource for the international development community, universities, and policy makers looking to build better evidence around what works in development.
  • Publication
    World Development Report 2004
    (World Bank, 2003) World Bank
    Too often, services fail poor people in access, in quality, and in affordability. But the fact that there are striking examples where basic services such as water, sanitation, health, education, and electricity do work for poor people means that governments and citizens can do a better job of providing them. Learning from success and understanding the sources of failure, this year’s World Development Report, argues that services can be improved by putting poor people at the center of service provision. How? By enabling the poor to monitor and discipline service providers, by amplifying their voice in policymaking, and by strengthening the incentives for providers to serve the poor. Freedom from illness and freedom from illiteracy are two of the most important ways poor people can escape from poverty. To achieve these goals, economic growth and financial resources are of course necessary, but they are not enough. The World Development Report provides a practical framework for making the services that contribute to human development work for poor people. With this framework, citizens, governments, and donors can take action and accelerate progress toward the common objective of poverty reduction, as specified in the Millennium Development Goals.
  • Publication
    Poverty Reduction in Indonesia : Constructing a New Strategy
    (Washington, DC, 2001-10-29) World Bank
    The objective of the report is to point at the need for a new poverty strategy, and the areas of action it should cover, where each area should be specifically discussed, addressing the lives of Indonesia's poor, and the tradeoffs policymakers will need to consider, based on the belief that this poverty strategy should emerge from a broad dialogue among stakeholders. First, in broadening poverty, the report looks at the facts of the late 1990s crisis, which revealed the precariousness of Indonesia's gains in reducing expenditure-based poverty. Thus to extend those gains, the poverty strategy needs to be defined, and then redeveloped by acknowledging the multidimensional reality of poverty, and, it is this notion which will lead to making the strategic choices. Second, within the country's political transition to a democratic, decentralized mode of governance, a poverty strategy needs to be consistent with an empowered populace, and democratic policymaking mechanisms. In creating a policy environment for raising the incomes of the poor, the report identifies the resumption of rapid sustainable growth, with rising real wages, employment opportunities, and, limited inflation, including the economic empowerment of the poor, enhanced by poverty-focused public expenditures. Inevitably, the provision of core public services is an area which should address the people's will in local governance policies, focusing on education and health, while providing appropriate infrastructure, and developing safety nets.
  • Publication
    World Development Report 2009
    (World Bank, 2009) World Bank
    Places do well when they promote transformations along the dimensions of economic geography: higher densities as cities grow; shorter distances as workers and businesses migrate closer to density; and fewer divisions as nations lower their economic borders and enter world markets to take advantage of scale and trade in specialized products. World Development Report 2009 concludes that the transformations along these three dimensions density, distance, and division are essential for development and should be encouraged. The conclusion is controversial. Slum-dwellers now number a billion, but the rush to cities continues. A billion people live in lagging areas of developing nations, remote from globalizations many benefits. And poverty and high mortality persist among the world’s bottom billion, trapped without access to global markets, even as others grow more prosperous and live ever longer lives. Concern for these three intersecting billions often comes with the prescription that growth must be spatially balanced. This report has a different message: economic growth will be unbalanced. To try to spread it out is to discourage it to fight prosperity, not poverty. But development can still be inclusive, even for people who start their lives distant from dense economic activity. For growth to be rapid and shared, governments must promote economic integration, the pivotal concept, as this report argues, in the policy debates on urbanization, territorial development, and regional integration. Instead, all three debates overemphasize place-based interventions. Reshaping Economic Geography reframes these debates to include all the instruments of integration spatially blind institutions, spatially connective infrastructure, and spatially targeted interventions. By calibrating the blend of these instruments, today’s developers can reshape their economic geography. If they do this well, their growth will still be unbalanced, but their development will be inclusive.
  • Publication
    Boom, Bust and Up Again? Evolution, Drivers and Impact of Commodity Prices: Implications for Indonesia
    (World Bank, Jakarta, 2010-12) World Bank
    Indonesia is one of the largest commodity exporters in the world, and given its mineral potential and expected commodity price trends, it could and should expand its leading position. Commodities accounted for one fourth of Indonesia's Gross Domestic Product (GDP) and more than one fifth of total government revenue in 2007. The potential for further commodity growth is considerable. Indonesia is the largest producer of palm oil in the world (export earnings totaled almost US$9 billion in 2007 and employment 3.8 million full-time jobs) and the sector has good growth prospects. It is also one of the countries with the largest mining potential in view of its second-largest copper reserves and third-largest coal and nickel reserves in the world. This report consists of seven chapters. The first six chapters present an examination and an analysis of the factors driving increased commodity prices, price forecasts, economic impact of commodity price increases, effective price stabilization policies, and insights from Indonesia's past growth experience. The final chapter draws on the findings of the previous chapters and suggests a development strategy for Indonesia in the context of high commodity prices. This section summarizes the contents of the chapters and their main findings.