Non-Banking Activities of Commercial Banks under Financial Deregulation in Developing Countries: Evidence from Bangladesh

The separation between banking and non-banking activities was withdrawn in 2009 in Bangladesh, following which the stock market has experienced the development of the biggest bubble and its eventual bursting in 2010-2011. This study aims at evaluating the non-banking activities of commercial banks by highlighting the causes behind the accelerated use of such activities under financial deregulation and their after-effects. The shrinking of the spread margin under an intensified level of competition encourages banks to accelerate the nonbanking activities. Moreover, the withdrawal of the separation hinders the well-functioning of the financial sector including the banking sector by amplifying the fundamental principalagent and moral hazard problems; by creating conflict of interest between central bank and Bangladesh Securities and Exchange Commission (BSEC); by eroding the regulatory structure of the central bank for monitoring and supervision of the banking sector; and by hampering the objective of financial deepening under financial deregulation. The banking sector regulator needs to consider the associated bad consequences of the withdrawal of the separation between banking and non-banking activities of commercial banks in a developing country like Bangladesh.