Abstract:
The Effect of Bank Regulation is one of the major concerns for banks and thus achieving the
optimum level of liquidity is crucial. The main objective of this study is to investigate The
Effect of Bank Regulation on Financial Performance of Private Commercial Banks in Ethiopia.
In order to achieve the research objectives, data was collected from a sample of six private
commercial banks in Ethiopia over the period from 1999 to 2019. Bank specific variables were
analyzed by using the balanced panel regression model. Bank Regulation is measured in two
ratios: leverage and loan ratios. The result of this study confirmed that, among the bank specific
variables legal reserve and liquidity reserve had statistically significant impact on the
determination liquidity of Ethiopian private commercial banks measured by leverage and
capital requirement, deposit reserve ,legal reserve ,non-performance loan ,saving interest rate and
liquidity reserve statistically significant impact with loan ratio. Whereas except legal reserve
and liquidity reserve all other variable had no statistically significant impact on the determination
of Bank Regulation of Ethiopian private commercial banks, The negative relationship between
capital requirement and liquidity was opposite to our hypothesis but consistent with the
“too big to fail” hypothesis. The coefficient sign for capital requirement revealed negative
relationship with liquidity and it was in line with our hypothesis and the finance theory.
However, capital requirement and deposit reserve have no statistically significant effect on
the liquidly of Ethiopian private commercial banks. For leverage liquidity reserve is
significant at 1%, banks and legal reserves at 5% while for loan ratio time, deposit reserve,
liquidity reserve and non-performance loan are significant at 1%, legal reserve at 5%, capital
requirement at 10%. Liquidity reserve is significant at 1% for both leverage and loan ratio.
