The effect of bank regulation on profitability and liquidity of private commercial banks in

School of graduate studies
This is to certify that the thesis prepared by Fanos Assefa entitles: The Effect of Bank Regulation On Profitability and Liquidity of Private Commercial Banks in Ethiopia and submitted in partial fulfillment of the requirements for the degree of masters of Science in accounting and finance compiles with the regulations of the university and meets the accepted standards with respect to originality and quality.

Approved by

Advisor:	Dr. Abebe Yitayew
		Signature	Date

Internal Examiner:	Dr. Alem H.
		Signature	Date

External Examiner:	Dr. Zenegnaw A.
		Signature	Date

Chair of Department or Graduate Program Coordinator

Acknowledgement

Undoubtedly, writing this thesis has been one of the most challenging and engaging but also considerably exciting experiences of my academic career & experience which I couldn‘t have done without the help of others. I feel the need to acknowledge the support of these great people.

First in the list comes Christ, the One whom I always counted on and the One who always showed up. I would like to express my sincere gratitude to my advisor Abebe (Ph.D) for his constructive advice and guidance since the research proposal preparation to the final writing of the Thesis. I am grateful to his invaluable comments and suggestions from which I have benefited a lot. No doubt his suggestions and recommendations contributed a great deal in the makeup of this thesis.

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And finally, I would also like to thank my friends without whom I would have found many things very difficult. I am marveled by their love, understanding, and encouragement. I am especially indebted to my beloved friend, Sisay Abera who always on side of me when I needed him. The help what I got from them in my data collection and editing of the document was simply amazing. I am deeply humbled by their patience and facilitation.

Table of Contents

Content page

Acknowledgement i
Table of Contents ii
List of Acronyms v
ABSTRACT viii

1. 
   INTRODUCTION 1
   
   1. 
      Background of the study 1
      

Measure NBE banking regulations 4

2. 
   Statement of the Problem 5
   
3. 
   Broad objective 7
   
4. 
   Specific objective 7
   
5. 
   Research question (RQ) 8
   
6. 
   Hypotheses of the study 8
   
7. 
   Significance of the research 9
   
8. 
   Scope of the study 10
   
9. 
   Organization of the Paper 10
   

Chapter Two 11

1. 
   Prudential regulation in banks 11
   
2. 
   Helping- hand theory 12
   
3. 
   Grabbing-hand theory 12
   
4. 
   Cost and benefit of bank regulation 12
   
5. 
   Do banks need to be regulated? 14
   
   1. 
      The systemic risk argument 14
      
   2. 
      Proposals to insulate banks from runs 16
      
   3. 
      Deposit insurance and moral hazard 17
      
   4. 
      Is fairly priced deposit insurance possible? 18
      
   5. 
      The depositors’ representative argument 19
      

2. 
   Banks profitability and liquidity and its measurement 20
   
   1. 
      Banks profitability 20
      
   2. 
      Bank liquidity 21
      
      1. 
         Anticipated income theory 22
         
      2. 
         Shift ability Theory 22
         
      3. 
         Commercial loan theory 23
         
3. 
   The Relationship between banking regulation and profitability and liquidity 23
   
4. 
   Empirical review 24
   
5. 
   Literature gap 28
   
6. 
   Conceptual framework 29
   

CHAPTER THREE 30

2. 
   Research approaches 32
   
3. 
   Variables definition 34
   
   1. 
      Dependent Variables 34
      

Table 3.1 Summarized Descriptions of the Variables and Their Expected Relationship 39
CHAPTER FOUR 40
EMPIRICAL FINDINGS AND DISCUSSIONS 40

1. 
   Descriptive Statistics 40
   

Table 4.1 Descriptive Statistics 40

2. 
   Correlation Analysis among Variables 42
   

Table 4.2.Correlation Analysis 42

3. 
   Testing Assumption of CLRM 43
   

Table 4.3 Heteroskedasticity test of model one 43
Table 4.4 Heteroskedasticity test of model two 44
Table 4.5 Autocorrelation test for model one 45
Table 4.6 Autocorrelation test for model two 45
Chart 4.1 Normality test for model one Table 4.7 Normality test for model one 46