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This paper analyses the implications of bank equity investment in firms on the stability of the banking system under conditions of asymmetric information and moral hazard. We show that there exists a “U-shaped” relationship between the risk of the universal and the investment banks’ asset and the level of their equity investment. Our theoretical and empirical results end up in favour of the choice of the European, Japan and American regulators who forbid banks from exceeding a threshold of equity investment. Such regulation must prevent banks to take excessive risks.Classification JEL: G21, G24, G28