This paper investigates the determinants of banking system fragility by underlining the impact of bank liberalization on banking stability during the process of financial liberalization in emerging and developed countries. To this effect, we adopted a panel model with spatial dependency from a transmission channel points towards trade interactions to estimate the parameters of the model on a panel of 40 emerging and developed countries during 1989-2010. The empirical results suggest that financial liberalization has the tendency to stimulate the banking instability in economies. Financial liberalization played a significant role in the transmission of the 1996 to 2002 crisis to emerging market economies and also to American and European countries in 2007 crisis. However, credit growth, a negative GDP growth and a high real interest rate are on average the most important causes of a banking crisis. Besides we find that the impact of the determinants differ between whole, advanced economies and emerging economies.