Financial Regulation and Development depositors’ reactions. Finally, as our model shows, safe asset regulation has a stronger effect on depositors in riskier/infant financial systems, with few countries presenting the simultaneous strong variation in the size of regulation combined with an underdeveloped banking industry.

For this reason, we investigate the following two case studies that uniquely address the previous concerns, as they present some of the lowest levels of financial penetration, combined with policy changes that caused substantial balance sheet reallocations toward safe asset.

1. Ethiopia (2011). In mid-March 2011, the NBE announced a policy change in financial regulation forcing all private banks to start purchasing 0.27 government bonds for every unit of private sector lending by April 2011.

2. Antebellum USA (1800–1861). Between 1800 and 1850, several states non-simultaneously introduced taxes (on capital or profits) on local banks in response to a loss of seigniorage revenue.

In both case studies, the identification of the policy effects are achieved by combining the time-series shocks (one policy event in Ethiopia, and a tax “phase out” across US states) with cross-sectional variation in bank sizes (big versus small banks), because heterogeneous effect of the treatment is prescribed by the theoretical model.

In order to address the data limitations previously mentioned for the Ethiopian case study, we have constructed a variety of unique databases through which we can track the whole financial system. Through confidential contacts with the NBE, we had access to the regulation documents and could interview senior executives for all private sector banks, which provided substantial insights on how this regulation affected their business. Regarding the available datasets, we track three key indicators of bank behavior: bank balance sheets with monthly frequency; a new map covering over 90% of bank branches opened in Ethiopia between 2000 and 2015; and digitization of all annual reports in the five years around the policy change. First, we obtained access to confidential data on the monthly composition of bank balance sheets, collected and confidentially released by the NBE, which allows us to explore the effect of the policy on the key modeling variables (safe assets, deposits, loans). The high frequency of the data permits us to track tightly the policy change, which has large and clear effects, as the empirical section shows. Secondly, because we are especially interested in financial development in terms of branch expansion, we have constructed a branch map for Ethiopia for the years 2000–2015, in which we were able to observe more than 90% of all bank branches and to find their date of opening (month and year), their city and region, telephone numbers and other information. This permits us to verify what happens to the long-term trend in branch expansion and to the numbers of new towns connected by a branch, both of which show significant increases after the policy introduction. Finally, in order to test the effects on profits and other yearly variables (number of employees), we have collected annual report data for all bank between 2008 and 2013. Though the power of this test is low because the number of observations is limited, we find that profits do not seem to decline and the number of employees expands, as expected.

For the Antebellum USA case study, we developed a dataset in which we follow a repeated cross-section of more than 1,200 banks for 60 years. Several historical sources were used for this 5