Regulation, financial crises, and liberalization traps

This paper examines how financial regulation and institutional quality affect the probability of a banking crisis using panel 138 countries over period 1996–2017. Our key inference is that fits an inverted U-shaped curve: it rises as stringency moves from low to medium levels falls high levels. Countries located in intermediate level regulatory face more instability than either loosely or severely regulated countries, which are caught “liberalization trap” “regulation trap,” respectively. Institutional interacts significantly with environment, implying trade-off stringency.