Limodio, NicolaStrobbe, Francesco2016-07-072016-07-072016-06https://hdl.handle.net/10986/24651In 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.en-USCC BY 3.0 IGOEMPLOYMENTBANKING REGULATIONDEPOSITMARKET – DEVELOPMENTSNATIONAL BANKSECONOMIC GROWTHACCOUNTINGDEPOSITSPEOPLESMALL BANKSPROPERTY TAXPRIVATE COMMERCIAL BANKSFINANCIAL MANAGEMENTVILLAGEBALANCE-SHEETBANKING INDUSTRYINTERESTLAWSGUARANTEESDEMAND DEPOSITSINDUSTRYBANKING SYSTEMSTRATEGIESSAFE ASSETSENTREPRENEURSBANKING SYSTEMSREVENUESLIQUIDITY RISKWELFAREENDOWMENTSLOANBUDGET CONSTRAINTSENDOWMENTFEEPROJECTSBORROWERSPAYMENTSSAVINGLOCAL GOVERNMENT FINANCEINTERNATIONAL BANKRURAL BANKSBANK COMPETITIONSTATE BANKSSAFETY NETSBANK LENDINGPRIVATE SECTOR BANKSPRIVATE SAVINGSPRIVATE BANKINGSAVINGSCAPITAL REGULATIONMORAL HAZARDCOMMERCIAL BANKBIG BANKBANK ASSETSPRIVATE BANKSCOLLECTIONSPRODUCTIVITYINTEREST RATESECONOMETRICSEXTERNALITIESTRANSFERSPAYMENTMARKETSDEBTBARRIERS TO ENTRYFINANCIAL CRISESLOCAL GOVERNMENTCAPITAL REQUIREMENTSPUBLIC FINANCELAND RIGHTSDEPOSIT INSURANCEBANK LIQUIDITYBANK OF ENGLANDBANKERSLOANSENTERPRISESFARMERSEQUITIESPENSION FUNDSFINANCIAL SYSTEMREAL ESTATEFINANCEADMINISTRATIVE COSTSBANK DEPOSITSINFRASTRUCTURETAXESBANKING SECTORBANKSGOVERNMENT SECURITIESDEPOSITORSFEDERAL RESERVESLRBALANCE SHEET GROWTHCAPITALFEDERAL RESERVE BANKBIG BANKSSTUDENTFAMILYCREDIT ACCESSACCESS TO FINANCEVALUEDEVELOPMENT BANKSBANKGOVERNMENT FINANCEBANKING PANICSCREDITMACROECONOMICSBANKING LAWSSAFETY NETBOND MARKETHOUSEHOLDREPAYMENTPROPERTYFORMAL ECONOMYPROPERTIESSAFE ASSETFINANCIAL SERVICE PROVIDERSFINANCIAL REGULATIONBALANCE SHEETFINANCIAL SERVICEDEPOSIT MOBILIZATIONSECURITIESPUBLIC DEBTRURAL BRANCHESGOVERNANCEINSURANCETAXATIONECONOMIC DEVELOPMENTINTERESTSLANDSOCIAL BANKINGSMALL BANKTIME DEPOSITSBANK PROFITSFINANCIAL DEVELOPMENTNATIONAL BANKINVESTMENTFINANCIAL INTERMEDIATIONRISKCOMMERCIAL BANKSHOUSEHOLDSBALANCE SHEETSFINANCIAL MARKETSBANKINGEMPLOYEECOOPERATIVESREVENUELENDINGSAVINGS BANKSFEESFINANCIAL REFORMFREE BANKINGOUTREACHENTREPRENEURSHIPBANK BRANCHESPAYMENT SYSTEMSGOVERNMENTSRESERVE BANK OF NEW ZEALANDLIQUID ASSETSBANK SIZEDEVELOPMENT BANKPRIVATE SECTOR LOANSDEPOSITORINEQUALITYEMPLOYEESWorking PaperWorld Bank10.1596/1813-9450-7734