The link between financial liberalization and the performance of the 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. Results revealed that all save one of the banks analyzed have not become more efficient after the banking sector is liberalized. Secondly, the link between financial liberalization and the banking sector crisis is assessed by mobilizing macroeconomic data and multivariate logistic regression technique. Results suggest that financial liberalization, bank’s lending rates and the ratio of M2 to foreign exchange reserves do contribute significantly to the 1997 banking crisis in Malaysia.