Done a quick bit of resurch for the game
Spyro Year of the Dragon NTSC and PAL both have anti mod protection, yes this will effect emulation aswell as on a chipped PSX
You can find various patch fixed at
http://consolecopyworld.com/psx/psx_patches_s_3.shtml
The fact that it crashes on Level 2 is normal

because of the protection, you get the same on a modded PSX or PS1 or any other sony console modded that can play PSX software
Sorry I should of realised what was up with this, this is not the first tyoe of protection that lets you play some of the game before it crashes out