International economic freedoms, banks and the market crisis of 2007–2009

Abstract

The objective of this article is to test whether banks in highly regulated countries performed better than banks in less regulated countries during the market crisis of 2007–2009. Bank index returns from 46 countries were examined from 1 October 2007 to 3 March 2009. The analysis revealed that high levels of government and fiscal freedoms, measured by the Heritage foundation freedom rankings, resulted in higher banking index returns that were highly significant. In contrast, high levels of financial freedom from regulation resulted in lower banking index returns that were marginally significant. The results suggest that regulators must find a delicate balance between improving the regulatory structure while not increasing the government or fiscal involvement in the economy. The results also indicate that simply increasing financial regulation will not reduce or eliminate the magnitude of future market crisis as regulation was only marginally significant in explaining banking index returns during the market crises.