The Effect of Banking Regime Change from Traditional Banking Operation to Universal Banking Operation on Financial Crisis

The difference between a universal and a traditional banking operation regime is that commercial banks can operate in securities, insurance, and real estate. Additionally these firms are permitted to hold or be held by non-financial firms and non-banking financial firms. The current paper examines the different regimes and their impact upon economic stability. This study seeks to empirically test the relationship between a country’s experience of an economic crisis and (a) the type of regime and (b) the degree of the banks’ involvement in key investment vehicles. This paper employs a fixed effect model encompassing data from 137 countries with a priority focus on OECD countries from 1997 to 2012. The results indicate that OECD countries that allow banks to step into securities and insurance businesses or allow them to hold or to be held by non-financial firms or non-banking financial firms are more likely to experience a financial crisis. The current study finds that OECD countries that allow banks to conduct real estate operations are less likely to experience a financial crisis. Results from this study may be useful to inform regulatory organizations in developing policies for limiting the probability of future financial crises.