Banks in may countries purchase share of countries in their home territory to speculate on share prices or to establish a stronger relationship with a client. These relationships are beneficial to the bank when share prices rise, but can hurt a bank when shares prices fall.

Banks profit by lending money and an economy relies on bank lending to function. A decrease in bank lending is a restriction on the money flowing through the economy, therefore, the economy decreases, because there is less money. If the economy decreases, then generally, stock prices also decrease. When banks hold shares in other companies when those shares become less valuable, then banks have less money to lend, which further restricts the economy and causes share prices to decrease further.

When banks hold shares in other companies during an economic recession, it causes the banks to restrict lending (because of shares decreases) just when the economy needs lending the most.

Many developed countries restrict share holdings by bank. …