LIBERALIZATION: SOME EVIDENCE FROM

The stability of the banking sector is the focus of every government at this moment. As the global financial crisis that originated from the US subprime mortgage meltdown unfolds, each country scrambled to come up with a plan to shore up calm and confidence. Malaysia has recovered not too long ago from a similar banking debacle, the 1997 East Asian Financial Crisis. The link between financial liberalization and the performance of the Malaysian banking sector is assessed here by employing two techniques. Firstly, using firm level data of Malaysian domestic banks to assess the allocative efficiency of the banking sector. Specifically, it tries to determine whether financial liberalization in Malaysia was able to promote a competitive environment that could boost the efficiency of banks in terms of reduction in intermediation spreads. Using cost-ratio analysis, two series of cost data (pre liberalization and post liberalization) were calculated. Results revealed that all save one of the banks analyzed have not become more efficient after the banking sector is liberalized. Secondly, by mobilizing macroeconomic data and Logistic regression technique to assess the contribution of financial liberalization to the banking crisis of 1997. Results suggest that financial liberalization, banks ' lending rates and the ratio of M2 to foreign exchange reserves contribute significantly to the 1997 banking sector crisis