Luận án tiến sĩ: Three Essays on Banking Integration in ASEAN

Context and Motivation

The evolution of banking integration

For a long period, cross-border banking was a critical element of financial integration and globalization In the context of this research, this term re- lates to both cross-border capital flows and cross-border banking entrances. Cross-border banking has developed over the years, particularly in the form of cross-border entry, from cross-border product offerings to the purchase or establishment of subsidiaries abroad, and has influenced the financial systems of the countries in many aspects and dimensions Literature has long researched the determinants and consequences of cross-border capital flow for a long time and has begun to examine the determinants and drawbacks, and advantages of the recent wave of international banking system entry In specific, an increasing number of articles have been exploring the impact of international bank entry on local banking systems, using data at individual, country, and regional bank level.

Figure1.1 illustrates the tremendous development of cross-border bank claims over the last years It has enormously impacted countries’ financial systems and economies around the world in many ways and dimensions (Claessens, 2006) After a continuous and dramatic rise, the crisis has led to a retrenchment in cross-border bank lending since the global financial crisis2007-2008 Furthermore, it can be observed that the evolution of international lending across regions is heterogeneous Especially after the global regression, financial credit markets have been more segmented While foreign bank claims to developed countries have rather continued to decline until 2015, cross-border banking to emerging markets and developing countries has accelerated again after 2009 In recent years, cross-border lending by banks has been growing at a "rapid" rate, reaching last seen growth peaks in early 2008 amid ongoing global uncertainties that have disrupted world trade.

What stands out in the fig 1.1is the rapid increase in cross-border bank claims from $687 billion to $31 trillion between 1977 and 2019 It reached a peak of $35 trillion in 2008 global cross-border bank claims suddenly decreased after the financial crisis 2007-2008 but increased afterward At the end of the year 2019, the outstanding stock of cross-border bank claims reached $31 trillion The BIS locational banking statistics reveal that banks’ global cross-border claims increased by $703 billion during the fourth quarter of 2019, pushing the outstanding stock to $31 trillion at the end-2019 This occurred in a 6% year-on-year rise, which is five percentage points higher than the previous five years’ average.

The short history of banking integration

From a historical perspective, there are three main financial globalization waves in modern financial history: (i) the first wave was in the 19th century with the European investments into emerging markets, (ii) the second started in the 1960s, mainly focused on financial transactions between banks among the largest economies, and (iii) the wave of financial globalization after the mid-1990s can be seen as the third such wave (on the Global Financial Sys- tem, 2010) Nevertheless, the first two waves did not include major foreign direct investment (FDI) in banking, in the form of cross-border bank expansion, particularly not in commercial banking, but rather bank lending and bond issues Thus, the first two waves witnessed a banking internationalization, without a banking ’multi-nationalization’ where banks set up branches outside their home country (Allen, Beck, et al., 2011).

Note: The figures demonstrate the outstanding amounts and annual growth in banks’ cross-border claims by counterparty regions The dashed vertical lines indicate the year 2008 (The global financial crisis 2007-2008).

Source: BIS locational banking statistics.

FIGURE 1.1: The evolution of cross-border claims around the world

Although international bank involvement has risen dramatically in both Africa and South America over the past 30 years, cross-border fusions and acquisitions have only remained popular in Western Europe around the past 20 years Even more impressive has been the transformation of most European banking systems, which has gone from state-owned, mono-bank systems to foreign-bank dominated systems over a 20-year period (for International Set- tlements, 2010).

Around the same moment, it was worth mentioning an expansion of the intermediation chain, along with a shift away from the system of originate- and-hold to the system of originate-and-distribute Securitization of loans to transfer them off-balance-sheet, often in special or structured investment ve- hicles, and the sale of derivatives on those assets, for example, in the form of collateralized debt obligations, have been increased This could be seen as financial innovation, as it has facilitated diversification of risk and great possibilities for investing This widening of the intermediation chain, on the other hand, increased the complexity of bank lending and removed incentives on the originating lender’s side to properly screen and track, provided that often 100% of claims on securitized loans are sold Furthermore, since some of these instruments were off-balance-sheets without the underwriting bank’s legal requirement, reputational requirements compelled banks to place these instruments back on their balance sheets, with detrimental effects on their positions of solvency and liquidity Ultimately, by converting at least a share of sub-prime, if not junk, assets into AAA securities for which no capital payment was necessary, securitization also served regulatory arbitrage purposes.

As several banks in Europe and across the developed and developing world have acquired securities based on US subprime mortgage loans, this problem has a significant cross-border component to it (Allen, Beck, et al., 2011).The years following the recession have also seen a shift towards funding banks on the wholesale market and at the international rather than national scale, such (Demirgỹỗ-Kunt et al., 1998) in financial and offshore centers. Money market funding for EU banks jumped from 11.8% of overall liabilities to 16% over 2003-2007, whereas short-term interbank funding soared from 0.1% to 2.9% The 129% growth in the issuing of securitized securities on the asset side has left banks exposed to these regions’ losses For instance, Icelandic banks funded a large part of their wholesale market acquisitions and switched to the selection of retail deposits just after the financing of those markets became prohibitively costly Foreign branches in the CEE area have also explicitly focused on interbank and wholesale markets instead of retail finance deposits (Aydin, 2008) These distinct developments in financing meant a shortening of the average tenure on the liability side of banks and thus an increased chance of rollover Although well for risk diversification, with potentially favorable consequences for bank customers, banks’ susceptibility to contagion shocks has also gone up.

A limited number of countries dominate the transnational banking activities In the second quarter of 2009, France, Germany, Switzerland, the United Kingdom, the United States, and the Netherlands represented 47% of cross-border banking claims On the liability aspect, half of the cross-border banking liabilities were provided by this group of countries However, as McCauley et al (2010) has pointed out that these countries adopted different methods The United States, Spain, and Switzerland follow the multina- tional model, with branches and local host country funding, while Japanese, French, and German banks adopt the international model, with more centralized funding (for International Settlements, 2010).

Ason the Global Financial System (2010) indicates, the expansion of the global banking business should be seen as complementary to the fast development of international financial markets Banks are essential when it comes to purchasing foreign securities and issuing foreign securities On the other way, the financial markets are based on banks to offer market participants liquidity, credit lines, and other services.

The importance of banking integration

The main advantage of cross-border banking comes along with its impact on risk diversification Following conventional theories introduced byDia- mond (1984) andWinton (1999), diversification enables banks to minimize risks and the general advice that follows is not to "place all eggs in one bas- ket" And like foreign asset holdings, this implies a more geographically diversified portfolio can reduce the risk of distress events In addition to the diversification benefits arising from cross-border banking reducing the risk of bank defaults and stabilizing loans, cross-border banking will lead to a better distribution of the risks of one country with other ones The effect of cross-border banking on the correlation of macroeconomic variables i.e GDP, investment, and consumption could be illustrated theoretically using the international variant of the real business cycle model (Baxter & Crucini, 1994; Neumeyer & Perri, 2005).

Another theoretically major advantage of cross-border banking is the relationship between competition and stability The international entrance would help to boost domestic banking competition Such influence would be specially marked when the domestic economy was historically heavily competitive or when domestic banks (frequently developing countries) were run- ning inefficiently One dimension of the latest research on the link between competitiveness and stability confirms that competitiveness promotes stability by minimizing borrower-level agency issues (Boyd & De Nicolo, 2005).Higher bank competitiveness reduces financing costs and thereby increases creditors’ gains So it decreases borrowers’ risk-shifting benefits and reduces creditor risk Nevertheless, this impact can rely more on international banks’ direct entrance than on the acquisition with the local institutions Borrower risk can also decrease as the likelihood of defaults is decreased by higher profitability Moreover, the existence of international banks can also be help- ful after a recession arises, as it helps domestic depositors to do their home

International banks utilize strategies like "rush to safety" (Clarke et al., 2000) and asset accumulation (Cull & Soledad Martinez Peria, 2010; Tschoegl, 2005) to mitigate recessionary impacts Moreover, increased capital flow within the banking sector enhances competition and cost-efficiency, leading to reduced loan rates (De Blas & Russ, 2008; Goldberg, 2004).

International banking connections pose potential risks, including feedback effects Foreign capital is highly mobile and may be withdrawn abruptly during economic downturns, leading to "cut and run" behavior In contrast, domestic banks have limited ability to quickly shift their resources The stability of international capital depends heavily on the type of cross-border banking International banks with subsidiaries in host countries are less likely to withdraw their investments due to fixed costs.

Another serious risk comes as a result of contagion: the local economy could be exposed to international shocks via the cross-border linkages For instance, a credit disruption to one country will be more quickly transferred to the other country when both economies remain financially interconnected(Kalemli-Ozcan et al., 2013) Different from a shock to production, a credit shock is spread through financial linkages to other nations, regardless of the level of domestic fundamentals In particular, a shock to parent banks’ capital base would lead to reduce funding to their subsidiaries and reduce direct loans to other financial institutions In the crisis 2007-2008, Degryse et al. (2010) described that the US subprime recession first undermined banks’ equity position in the United States, and then, by contagion effects, impacted negatively banks’ equity positions all over the world The existence of international banks in emerging markets, as discussed above, led to the propagation of the 2007-2009 crisis to these countries, both by way of a decline in direct loans and by means of internal capital markets (Cetorelli & Goldberg, 2011).

International capital flows are generally regarded as having nontrivial implications for macroeconomic outcomes Financial crisis experience has shown that the susceptibility to external shocks can differ significantly rely- ing on the economic sector(s) where capital flows in Sovereign debt, for instance, demonstrated as the weakness of the financial system in the crises of Latin America, when private sector debt was the primary source of fragility in the Asian financial crises In the United States, the source of the problem was the subprime domestic household debt at the time of the most recent global financial crisis (Allen, Beck, et al., 2011).

Motivations of the study

Overview of the theoretical and practical literature reveals the challenges of banking integration studies in the context of global financial instability and market volatility While numerous studies have been conducted out in developed countries, in the euro area, and at the industrial or national level, there are a few studies based on EMEs, especially in Southeast Asian (ASEAN) countries Therefore, this highlights the potential to apply the framework in specific ASEAN economic settings.

I focus on the ASEAN countries since the above-mentioned trends/ movements of banking integration have been particularly influential in the Asia- Pacific, one of the world’s largest regional banking markets; especially the attempts towards a complete financial integration in the ASEAN banking sector have been taken since after the Asian financial crisis 1997-1998 and the global financial crisis 2007-2008 Considered a big success story in the history of economic growth, ASEAN has also become the most vulnerable region in terms of financial stability Since the late 1970s, this region has out- performed the rest of the world in per capita GDP growth and is still one of the world’s fastest-growing regions with average GDP growth of more than 5% per year (Almekinders et al., 2015) Taken as a whole, ASEAN has now become the seventh world’s largest economy and, in the near future, aims to become a crucial consumer market But economic sustainability was threat- ened by the fact that two major financial crises in just over a decade affected the region seriously The 1997-1998 regional currency crisis and adverse feedback from the global financial crisis of 2007-2008 demonstrate vibrant proof about shock propagation within and between countries/ regions Therefore, examining the recent wave of foreign entry in this area, ASEAN countries’ economic-wide risk interactions and spillover effects capture the attention of potential investors and policymakers, particularly in terms of the establishment of the ASEAN Economic Community (AEC) by the end of 2015, and further regional financial arrangements/safety net So, understanding the impact of cross-border banking has become an urgent research priority and a study investigating the banking integration of ASEAN is crucial.

The ASEAN Banking Integration Framework

Driven by advanced economies and financial centers, cross-border banking has witnessed significant growth since the 1990s Despite lower exposure in emerging markets, foreign banks have become active investors, notably in ASEAN ASEAN's cross-border trade has also experienced substantial growth in recent years, highlighting the region's increasing economic integration.

ASEAN is composed of a diverse community of ten rapidly growing countries with different phases of economic and financial development: Brunei, Cambodia, Indonesia, Lao P.D.R., Malaysia, Myanmar, the Philippines, Sin- gapore, Thailand, and Vietnam Their demographics are young and rising, and the savings are high But there are also significant investment needs related to expanding industrialization, the increasing middle class in the area, and the need to increase connection and improve the hard and soft infrastructure The region has seen enhanced flows of trade and capital, both inside the region and with the rest of Asia and the world Financial integration with ASEAN has also been progressing Foreign direct investment has soared; cross-border connections in the banking section have deepened, and international participation has increased on the ASEAN capital markets. Only in 2013, trade within ASEAN jumped by 26 percent to $323 billion This rise was forecast to continue especially with the establishment of the ASEAN Economic Community (AEC) by end of 2015 As the result, the increase in cross-border financial services activities has been supported by the increase in trade So the financial institutions such as banks have played a critical role in this situation.

During the Asian financial crisis 1997-1998, risk features of the regional credit market were considered as relatively homogeneous by foreign investment The Asian financial crisis had a significantly damaging effect on the economies of Indonesia, Malaysia, Philippines, Singapore, and Thailand As a result, significant amounts of capital flows have been withdrawn from the ASEAN banking sector Indonesia, the Philippines, Malaysia, and Thailand are the countries that received the most damages It was the same in the global crisis 2007-2008, ASEAN banks observed the huge withdrawals of Eu- ropean banks from the region In the global financial crisis, it witnessed the withdrawals of European banks from ASEAN Data from the Bank of Foreign Settlements (BIS) suggest that the exposure of European banks to Emerging Asia dropped from 31% in 2008 to 13% in 2014 (Maria et al., 2017).

After these crises, efforts were taken to strengthen the banking system by enhancing the banks’ soundness, regulation, and competitiveness Those enhanced capitalizations and decreased the bank sector’s non-performing loan ratios (Yamanaka, 2014) Furthermore, the impact of the crisis emphasized the need for greater cooperation among the ASEAN countries and encouraged intra-regional trade Understanding the importance of the banking sector as the key driver on the regional financial market, the ASEAN Banking Integration Mechanism (ABIF) has been introduced for the ASEAN commercial banks to integrate the banking sector by 2020 The key goal of the integration is to capitalize on economies of scale of a broader customer base and to establish cooperative technology and knowledge transfer This will be de- signed on the basis of the ASEAN Single Market Principles that allow equal access, equal treatment, and equal environment for the region’s participants.

Since then, greater trade within the region has opened the way for financial integration and liberalization initiatives in the context of the ASEAN financial framework to boost financial inclusion and financial stability (Ariyasaj- jakorn et al., 2020) Integration in the banking system assists alleviate the discrimination that economic agents face in accessing and investing their capital, in particular their geographies More cross-border financial transactions are encouraged by equal market access, which then would accelerate the cross-border holdings of financial assets The expansion in their client base can lead to a rise in bank size This can theoretically eliminate the arbitrage opportunities and contribute to the convergence of asset prices and yields among markets The economic theory advocates the notion of market convergence through one-price law This law suggests that when assets have similar cash flows and are subject to the same risk factors, prices can converge on a single market The ASEAN banking sector can, on the basis of this law, achieve a long-term price equilibrium as a result of incorporation into the banking sector This is expected to encourage price reductions for banking services, thereby helping to foster an "inclusive development" in the region.

Nevertheless, up to now, the development of banking integration in the ASEAN is still quite slow as opposed to trading integration While many ASEAN banks, such as DBS, OCBC, UOB, CIMB, and Maybank, have begun expanding their presence in this area, the ASEAN’s degree of cross- border banking is still three times less than the Eurozone (Unteroberdoerster

& Pongsaparn, 2011) In accordance with this, ABIF seeks to remove entry barriers against foreign banks, eradicate discrimination against foreign institutions, and ensure complete regulatory harmonization of regional banking regulations.

The banking sector of ASEAN could be classified into two groups based on their economic and financial development phase (Almekinders et al., 2015).The first group consists of countries with a more developed banking sector,such as Indonesia, Malaysia, the Philippines, Singapore, and Thailand, while the second category consists of countries with a less developed banking sector, such as Brunei, Cambodia, Laos, Myanmar, and Vietnam As such, there are wide gaps in prudential regulation, financial stability infrastructure, and capacity building (Wihardja et al., 2013) Local ASEAN banks concentrate more on retail banking and rely more on deposit funding On the basis of their development phase, the policymakers have allowed these ASEAN countries to follow various approaches in terms of their time and processes for strengthening integration ASEAN countries also differ according to their restrictions on the entry of international banks Malaysia, Thailand, and Viet- nam have stricter regulations than the others (Ahsan et al., 2015) Foreign ownership limits in the acquisition of a local bank also vary among countries, some of which allow 100% ownership (e.g Singapore), while others allow up to 30% ownership (e.g Vietnam) Some countries put restrictions on foreign-owned subsidiary banks by limiting the number of branches and off-premise Automated Teller Machines that they can run In particular, regional expansion by the ASEAN banks is dominated by banks from Singa- pore and Malaysia Meanwhile, in Myanmar, Laos, Indonesia, and Vietnam, state ownership of banks is prevalent (Hamid & Zulkhibri, 2019) Foreign banking penetration is relatively high in Thailand (78%), Malaysia (81%) and Singapore (96%) as compared to Indonesia (36%), Philippines (31%), Viet- nam (31%) and Cambodia (22%) (Wijeratne & Clayton, 2018) This suggests a tremendous potential for growth and incentive for foreign investment in the banking sector of the region I am concentrating on the ASEAN countries as the above-mentioned trends have been particularly prominent in the Asia-Pacific - the world’s largest regional banking market The withdrawal of European banks, which dominated the cross-border operation in the pre-GFC years, provided opportunities for regional banking groups to step in and made the vast majority of intraregional intermediation (Remolona &

Shim, 2015) Continuing efforts have been contributing to these developments to further intraregional trade and financial integration in ASEAN A study assessing the readiness of ASEAN banks for integration is essential.

Background of the study

What is the banking integration

In many previous studies, banking integration and financial integration have been used interchangeably (Landier et al., 2017) However, some have pointed out that banking integration is a part of financial integration Eyraud et al. (2017) explained that financial integration was "Financial integration is the process through which the financial markets of two or more countries or regions become more connected to each other This process scan take many forms, including cross-border capital flows (for example, firms raising funds on capital markets cross-border), foreign participation in domestic markets (for example, a parent bank’s ability to set up a subsidiary abroad), sharing of information and practices among financial institutions, or unification of market infrastructures It can have a regional or global dimension, depending on whether a country’s financial market is more closely connected to neighbor- ing countries or to global financial centers/institutions Financial integration is thus a multi-faceted concept with no universally-accepted definition".

Banking integration involves the interconnectedness of banking systems through cross-border activities Key (2003) identifies four forms of cross-border financial services under the GATS system: cross-border supply (trade in goods and services), consumption abroad (accessing services while traveling), commercial presence (establishing branches or subsidiaries), and distribution through foreign agents This thesis focuses on cross-border capital flows and foreign participation in domestic markets, which are considered the most significant forms of financial services trade.

It is crucial to highlight that significant interactions exist between the liberalization of capital account and the liberalization of financial services, and thus between the two forms (Dobson, Jacquet, et al., 1998) Apparently, if there is limited capital account freedom, several key elements of the supply of domestic financial services by the foreign financial institution (3rd form) would be hindered Conversely, the level of capital account liberalization and the capacity to provide financial services through capital flows would affect encouragements to set up the branches or subsidiaries in the host market.

Systematic Literature Review

In this subsection, I adopt a systematic literature review methodology (Tran- field et al., 2003) in combination with bibliometric and network analysis for a comprehensive evaluation of the banking integration research topic, aiming to provide insights for current research interests, identify potential research gaps and highlight the boundaries of knowledge.

Note: The data was extracted from the Web of Science (Social Sciences Citation Index) for the period 1970-2020

FIGURE1.2: Publishing trend in Banking integration field

According to the Web of Science database, there are 1,189 journal articles related to the banking integration field which were published between

1970 and 2020 To ensure that the aspects of the term banking integration are fully captured by the keywords, I included keywords such as “banking integration”, “financial integration” and “cross-border banking” The keywords were chosen based on previous literature reviews on related subjects, the author’s own research experience, and expert views from fellow banking integration academics Fig 1.2 shows an upward trend in terms of the number of articles published per year since 1996 Before 2005, less than 20 papers were published per year However, after the global crisis 2007-2008, this topic attracted more the interest of the researchers when it was indicated as one of the main results of this regression Then the number of publications increased dramatically, over 90 papers/ year in 2015 The research interests have still remained in recent times.

However, when searching on the Web of Science with only the keyword

"banking integration", there are only 35 articles published in Social Sciences Citation Index journals in the period 1970 - 2020 Although the numbers of publications are quite small, which can be clearly in fig 1.2 is the rapid growth of the interests in the banking integration field especially after the global crisis 2007-2008.

Co-citation analysis elucidates key concepts, theories, and core themes within the banking integration discourse This approach creates a co-citation network comprising nodes (journal articles) and edges (co-occurrences in other papers) Co-citations indicate the presence of articles together in the references of other works, suggesting a connection between their subject areas The resulting co-citation map serves as a visual representation of data structure, facilitating the identification of relationships and concepts through graph theory.

Using bibliographic and visualization tools, research clusters were identified, including major research trends on this topic Based on these identified clusters, I proceeded to identify research gaps and propose future research (See Appendix 1)

Note: The term co-occurrence network within keywords and abstracts was visualized by VOSviewer (See Appendix 1) Green zone: cluster 1, Red zone: cluster 2, Blue zone: cluster 3, Yellow zone: cluster 4.

Source: Web of Science, VOSviewer and Author’s calculations.

FIGURE1.3: Literature classification: Four research clusters in the banking integration field

Using the keywords and the abstracts of the articles, four research clusters have been identified with co-citation analysis (see Fig.1.3).

• Cluster one focuses on the measures and determinants of banking integration This cluster is focused on measuring the degree of banking integration based on the actual capital flows or entry and exploring the key drivers of banking integration.

• Cluster two is mainly focused on the benefits of banking integration in the local economy and banking system This cluster investigates how banking integration affects the efficiency of the local banking system and shows whether the banking integration creates value for the local economy by contributing to economic growth.

• Cluster three is about the cost of international financial and banking integration It examines how banking integration has largely contributed to the crisis, and which various potential threats of cross-border banking to the banking system’s financial stability.

• Cluster four is the implications of cross-border banking to capital markets’ integration It analyzes the banking integration based on the components of capital markets (for example, interest rates) The influences of financial integration in capital markets are experienced not only in terms of supply and demand dimensions but also in terms of institutional aspects.

Cluster 1: The measures and the determinants of banking integration.

The measures of banking integration In reality, the level of banking integration is difficult to quantify, even for developed markets where data are more sufficient than for the emerging markets Conventionally, there are two types of measures, using prices (for instance, interest rates) and quantities(for instance, actual capital flows or physical entrance) In developed countries like the EU, integration has been observed to be strong in wholesale banking and certain areas of corporate finance, and weak in retail banking (P P Barros et al., 2005) In the EU, cross-border penetration was the lowest in retail banking, in terms of quantities However, with regard to price, differences in spreads were reported to be the least in corporate banking and the largest in retail markets (Baele et al., 2004; P P Barros et al., 2005).

In developing countries, banking integration is often limited due to weaker economic fundamentals and institutions Traditional measures of integration focus on capital flows and foreign bank presence However, recent research emphasizes the importance of banking connectedness Scholars employing network analytic techniques have examined the international financial and global banking networks to evaluate this aspect Arribas et al (2020) combine measures of bank openness and connectedness to assess the overall degree of banking integration These approaches provide a more comprehensive understanding of the level of integration in developing countries.

According to the drivers of banking integration, the literature has identified domestic conditions, institutional characteristics, economic and financial openness, political stability, and growth opportunities as the key drivers of capital flows and foreign entry into the host countries (Clarke et al., 2003; Eichengreen, 2004) Financial centers tend to be playing a crucial role as they occur more entry relative to these factors (Buch, 2003; Buch & DeLong, 2004; Focarelli & Pozzolo, 2003) In literature, capital flows have been reported to be driven by perverse causes, such as moral hazard in the form of a government-provided safety net (Dooley, 2000) In the literature, some key drivers of banking integration are considered as expected countries’ credit- worthiness, quality of the institutional environment, and growth opportunities (Clarke et al., 2003; Eichengreen, 2004) Shirota (2015) suggested to distinguish the cross-border credit flow influencing factors into main principles: global common factor as "push factors" and country-specific factors as

For entry, in addition to these above general factors, a residual role has been reported for indirect barriers, such as restrictions on mergers and acquisitions (Berger et al., 2004) Empirical findings and industry reports (Group, 1997) suggest that such obstacles can often be very complex and elevated by incumbents, such as when access to the payment system is restricted to incumbents via particular pricing or other regulations (i.e South Africa) or when there are limitations to interest payments on demand accounts (i.e. France).

In chapter 2, I will develop the current metrics by introducing two extended indicators to measure the banking integration degree By taking both directions of cross-border banking flows, the banking integration level will be considered via two aspects openness degree and balanced degree So, this thesis gives a comprehensive picture of banking integration in ASEAN, as well as contributes to determining its key drivers in this region.

Cluster 2: Bank integration, Financial development, and economic growth.

The literature review suggested some possible beneficial effects, there are three main dimensions: diversification, efficiency, and development.The first primary advantage of banking integration stems from its influence on diversification and risk-sharing It is widely acknowledged from portfolio theory (Markowitz, 1952) that by carrying a mix of assets in the portfolio instead of investing in a single one alone, an investor can reduce the risk Banking integration or cross-border banking enables significant improvement in diversification In the case that a domestic bank operates internationally (e.g through granting loans to clients in other countries or through acquiring foreign banks), domestic shocks become less susceptible.This eliminates the volatility of its asset portfolio Then, lower asset volatility could decrease the risk of bank defaults in the local banking system Leav- ing aside bankruptcies, the impact of cross-border banking on diversification can indeed minimize domestic lending variability It’s because a lower risk exposure of local banks decreases the probability that they come into circumstances when their lending has to cut back A bank that has been linked with major valuable depositors in foreign countries, for instance, would be less impacted by panic by local depositors While the advantages mentioned so far derive from the cross-border activities of local banks, the activities of foreign banks also have a diversification impact on the domestic economy Firstly,the participation of international banks enables domestic companies to build several financing relationships with both domestic and foreign banks Com- panies may replace domestic lending with foreign bank financing when domestic banks are lending-constrained And if these companies have not al- ready had a partnership with a foreign bank, after a shock to the credit capacity of domestic banks they could turn to the foreign banks which are now operating in the local market Moreover, even though the companies can not actually receive further funding from international banks after the domestic panics, there are still advantages It’s because lending to domestic companies overall would be less volatile when compared with only the domesti- cally funded companies are impacted Diversification benefits occur because cross-border banking decreases the risk of bank defaults and remains stable funding, cross-border banking will lead to a better sharing of an economy’s vulnerabilities with other economies So, the impacts of cross-border banking on macro-economy variables, for instance, GDP growth, investment, and consumption, over time can be seen theoretically using the international variant of the real business cycle model (Baxter & Crucini, 1994; Neumeyer & Perri, 2005) A positive productivity shock in home countries would result in increased lending in the host country, irrespective of the domestic resources available In theory, this risk-sharing, at least regarding tradable securities, may also be undertaken by investors Nevertheless, it is a curious aspect of international finance that since currently there are evidently a few crucial obstacles to international risk sharing, there really is a substantial lack of this kind of risk-sharing It is well recognized, for instance, that the port- folios of investors show a great tendency towards holding local securities (French & Poterba, 1991) Usually, the benefits that are foregone by this absence of risk sharing are expected to be high Firstly, these advantages occur because households benefit from lower consumption volatility due to risk aversion, for example,Van Wincoop (1999), who concluded these benefits to be in the scale from 1.1% to 3.5% of permanent consumption Secondly, they also emerge because lower risk exposure encourages specialization in greater return operations (Obstfeld, 1992).

Main contributions of the thesis

The main contributions of this research are that it fills the literature gap which showed in section 1.2 in analyzing the trade-off between the benefits and costs of banking integration, especially in Southeast Asian countries.

Over the previous several decades, the flow of foreign capital into the banking market has dramatically expanded, particularly after the launch of

ASEAN in 1997 Cross-border banking is studied in a large number of theoretical and empirical research but is mainly focused on developed countries, the euro area, and at the industrial or national level While there are limited literature studies on EMEs, especially in Southeast Asian countries, this study will provide new findings on the impact of banking integration on the ASEAN economy as well as on the trade-off between the gains and risks of ASEAN cross-border banking.

In addition, the study results would provide some recommendations on crucial policy implications for regional governments, in particular in the context of the introduction of the AEC in 2015, which seeks to establish: (a) a single market and production base; (b) an increasingly competitive economic region; (c) an equal and fair economic development region; and (d) a region completely integrated into the global economy This would be a significant challenge for ASEAN economies and residents and thus will open up a new phase, since their business and economic interactions will continue to function under the international agreements and regulations of the AEC.

It is undeniable that it will be an important aspect for potential investors and policymakers to investigate the recent waves of foreign entry in this banking sector and their effects on ASEAN countries.

This section outlines the key findings and contributions for each empirical essay in the thesis.

First essay Banking Integration in ASEAN-6: An Empirical Investigation

The first issue is on the measures of banking integration This first essay aims to introduce extended measures of banking openness and the overall balanced degree of integration through capital flows In general, this first essay contributes to the banking integration literature in the following aspects.

Utilizing unique indicators, this study measures banking integration in ASEAN-6 economies Despite increased cross-border banking and economic interconnectedness, banking openness (inflows and outflows relative to total assets) remains low and declining While balance (balance and diversification of outward and inward integration) fluctuates, it achieves equilibrium over time Singapore stands out with high integration levels, while other ASEAN-6 countries exhibit low integration and a focus on capital inflows over outflows.

Secondly, I get the first picture of the determinants of an overall balanced banking integration degree in a banking system, which included a balanced and diversification degree Moreover, this study investigates, for the first time, some specific drivers for the banking integration in ASEAN-6, a bank-based financial system While attempting to enhance the strength of greater integration in these economies and, in particular, to increase the level of banking integration, it would be useful to examine drivers that raise the level of integration to make policy choices in these ecosystems As the result, the research highlights the main drivers of banking integration in this region, such as regulatory quality, bank size, and global credit risk.

Understanding key banking integration factors, such as GDP, exchange rates, and regulatory quality, holds crucial importance for governments to ensure banking stability and integration These factors are subject to government regulation and adaptation, enabling authorities to effectively manage them The lessons learned from the 1997 Asian financial crisis and the 2008 global crisis underscore the significance of meticulously addressing these factors within the ASEAN-6 region to promote financial stability and foster banking integration.

These extended indicators developed in this first essay are applied to the two rest essays to gain more insights about the impacts of banking integration on the ASEAN banking systems.

Second essay Banking integration and market competition: Evidence from ASEAN-6 countries

The second essay is about the banking integration’s effects on competition of the local banking system in ASEAN Overall, my research contributes to the literature on the effect of the different aspects of banking integration (capital and physical penetration integration) on the competition There is a significant interest in understanding the effect of banking integration on competition, especially when the European interbank market was established (J F.

De Guevara et al., 2007; J F De Guevara et al., 2005) However, most of them only investigate this relationship under the single aspect of banking integration By employing the convergence of both interest rates and margins among EU countries,J F De Guevara et al (2007) found the financial integration has the effects on market power and inequality among banks Hagen- dorff et al (2009) assessed the EU integrated policies on the banking market’s competition Regarding physical participation, the literature suggests that different modes of banks may have different impacts on competition (Jeon et al., 2011; Lehner, 2009) By using the dataset of 3217 bank-year observations in ASEAN-6 in the period of 1996-2018, this research found the impacts of three aspects of banking integration on the competition: (i) the positive relationship between banking openness and banking competition, (ii) the overall balanced degree can lead to the higher market power and less competition, (iii) the physical participants of foreign banks may cause the banking system more monopoly, which can be restrained with the good regulation quality. Two alternative competition measures are employed to test the robustness of the results.

The results of this work will unravel and shed light on the understanding of in which integration forms and in which regime of the other conditions: greater banking integration will enhance competition Moreover, by using the polynomial model and threshold model, I found the nonlinear and heterogeneous impacts of banking integration in different regimes These findings suggest that ASEAN 6 should improve the regulation quality in order to increase the banking competition under the banking integration situation.

This study contributes to the understanding of banking integration and competition in ASEAN, an emerging market economy where the banking sector is the primary source of lending Despite existing literature on the topic, there is limited research specifically addressing the relationship between banking integration and competition in Southeast Asia While studies have examined banking competition's evolution during financial integration, they have not directly analyzed the impacts of different forms of banking integration This study addresses this gap by examining the effects of banking integration on competition in ASEAN countries.

Third essay Banking Integration and Stability: The Trade-off between

Risk Sharing and Contagion Risk

The third essay concentrates on analyzing how three aspects of banking integration affect the stability (bank insolvency risk, credit risk, and liquidity risk) in ASEAN-6 This section contributes to the existing literature in several ways Firstly, the three aspects of the two forms of banking integration were employed to test the impact on stability By using the dataset of commercial banks in ASEAN-6 in the period of 1996-2018, this research found: (i) the foreign banking capital exposures induce the banking system less stable (ii) however, the balance degree of the banking capital integration and the physical participation of foreign banks make the banking system more stable.

Secondly, besides the bank solvency risk which is often used as the proxy for stability in the literature, the liquidity and credit risk also are taken into account to exhibit a more precise picture of banking integration’s effects The degree of banking openness raises the liquidity resources of the local banking system, thus allowing these banks to take more new risks Thus, as a result, non-performing loans would be raised and banking systems might be less safe The overall balanced degree and the foreign participants, nevertheless, have an inverse effect on the credit risk and the risk of liquidity, which are helping to make the local banking system more stable.

Thesis structure

The thesis is structured as follows Chapter 2 expand the various metrics that help in evaluating banking integration It provides the whole picture of the banking integration in ASEAN-6 through two indicators: banking openness and overall balanced degree The second part identifying the determinants of banking integration Chapter 3 investigate the beneficial impacts of cross-border banking on banking competitiveness I then suggest the implications of broader trends in regional and international cross-border banking, and particularly what the changing competitive landscape implies for competition policy in some special circumstances and different regimes inASEAN-6 Chapter4 focuses on the effect of banking integration on stability or banking risk (bank insolvency risk, and liquidity risk) By employing the spatial model, this chapter also investigates how banking instability and economic uncertainty information transferred through cross-border linkages among banking systems Finally, Chapter5concludes with a summary of the main findings, contributions, and implications of this thesis.

Appendices

Appendix 1.1: The techniques for systematized literature review

In this thesis, I used fractional counting techniques in order to do a systematized literature review (Perianes-Rodriguez et al., 2016) The results will be presented based on mapping and clusters through VOS software (Van Eck

& Waltman, 2014; Van Eck et al., 2010) By considering each research articles (title, abstracts, etc.) as each node in a whole network of researches about banking integration, clustering techniques are created based on the following model: s ij = 2ma ij k i k j sij: normalized association strength between nodes i and j, or the degree of similarity between nodes i and j a ij : the number of studies is similar between node i and j m: total number of all aspects of research across the network m = 1

2∑ i k i k: total number of all aspects of node i or j k=∑ i a i

After calculating the degree of association, I connected the nodes through the mapping technique, with the function

Finally, the nodes will be grouped (clusters: c1, , cn) through maximizing the function

Banking integration is widely considered as the last stepping stone of economic integration, especially at the regional level This chapter aims to introduce extended measures of banking openness and the overall balanced degree of integration through capital flows Using the quarterly data from the ASEAN-6 economies (Indonesia, Malaysia, Philippines, Singapore, Thai- land, and Vietnam) from 1996Q4 to 2016Q4, the obtained empirical results reveal that: (i) the degree of banking openness, which measures the total inflows and outflows divided by the total banking assets of the given country, remains low and even slightly decreases, despite the increasing cross-border banking and greater economic links among ASEAN-6; (ii) the overall degree of balance, which calculates the balance and the diversification of outward and inward integration, fluctuates over time but reaches the well-balanced level Furthermore, the research highlights main drivers of the banking integration in this region, such as regulatory quality, bank size and the global credit risk These findings have important policy implications for banking stability and integration in ASEAN-6.

Introduction

Banking integration is defined, according toBouvatier and Delatte (2015); Pérez et al (2005), as the process through which banking systems are linked in the form of cross-border banking activities or banking asset cross-border flows Cross-border banking has increased tremendously since the 1990s, and has been dominated by a few advanced economies and financial centers (Moghadam, 2011) This global trend declined after the 2007-2008 recession. However,Bouvatier and Delatte (2015) found that there has been a dramatic rise in international banking integration outside the euro area since 1999, and more so since the recent global financial crisis In particular, according to the Bank for International Settlements (BIS), the total bank claims to ASEAN-6 countries grown dramatically after this period.

In emerging markets, although cross-border banking exposure remains relatively low, recently it has been one of the major sources of financing for these economies’ process of catching-up On the one hand, cross-border banking has allowed participant countries to benefit from greater risk-sharing and diversification, to stabilize local lending, and to increase competitiveness One the other hand, such cross-links could also be detrimental and cause feedback effects, especially the potential for capital flow volatility and contagion risk (Le & Dickinson, 2016; Mihaljek et al., 2008; Schoenmaker & Wagner, 2013).

Considering the importance of these issues, it is essential to measure the degree of integration as well as the determinants of cross-border banking activities Current literature on cross-border banking identifies the integration process through the bank claims (Bouvatier & Delatte, 2015; Pérez et al., 2005; Schoenmaker & Wagner, 2013) and other proxies like loans, credit flows (F M Bremus, 2015; Herrmann & Mihaljek, 2013), the cross-border direct retail operations of banks (Gual, 2004), and cross-border bank mergers (Kửhler, 2010).

Regarding banking integration, two key issues arise First, the inclusion of liabilities is crucial for measuring integration, as gross positions should encompass both assets and liabilities, similar to trade openness This enhances the accuracy of representing financial integration Second, while research on financial integration abounds, the determinants of banking integration, particularly banking openness and diversification, remain underexplored Further investigation into these determinants is essential for a comprehensive understanding of banking integration.

ASEAN is one of the most dynamic economic regions and plays an essential role in the world’s economy Recognizing the importance of financial integration as well as regional banking integration, the ASEAN Banking In- tegration Framework (ABIF) was established in December 2014, led by theQualified ASEAN Banks Although there are the pros and cons of financial and banking integration, ASEAN countries have opted to take risks to exploit the benefits of financial integration, especially promote competition(Ventouri, 2018) This is reflected in many bilateral and multilateral agreements that have been signed in recent years Despite this awareness and the financial systems in the ASEAN-6 countries are bank-based (Dao et al.,2016), banking integration of the ASEAN-6 countries is still relatively low compared with other developed regions or economies So, the object about the full banking integration in the region is still challenging for ASEAN-6(Ventouri, 2018).

Founded on the previous starting points, my study attempts to contribute to the current literature with extended measures of banking integration, and the determinants of banking openness as well as overall balanced degree By measuring the degree of banking integration of ASEAN-6 nations and analyzing the determinants of this process, I can document that the degree of banking openness remains low and has even slightly decreased, while the overall balanced degree is moderate on average I also identify that some macroeconomic factors and the banking industry’s characteristics are important determinants of banking openness and the overall balance degree ASEAN plays an increasingly important part of the world economy, and economists are interested not only in developed markets but also in these countries So, the study of these countries will provide many vital implications in banking integration for investors as well as policymakers.

The structure of this chapter consists of: a literature review in Section 2.2, methodology and data in Section 2.3, empirical results and discussion in Section 2.4, and conclusions in Section 2.5.

Literature review

In many previous studies, banking integration and financial integration have been used interchangeably and measured as the flow of financial services (Landier et al., 2017) However, some have pointed out that banking integration is only a part of financial integration.Eyraud et al (2017) explained that financial integration was “the process through which the financial markets of two or more countries or regions become more connected to each other.This process can take many forms, including cross-border capital flows (for example, firms raising funds on capital markets cross-border), foreign participation in domestic markets (for example, a parent bank’s ability to set up a subsidiary abroad), sharing of information and practices among financial institutions, or unification of market infrastructures" Therefore, banking integration could be defined as the process through which the banking systems become connected in the form of cross-border banking activities or cross-border flows of banking assets (Bouvatier & Delatte, 2015; Pérez et al., 2005).

One of the major streams of banking integration research explores how to measure this process Some of the measures of banking integration proposed in the literature consider banking integration as financial integration, either directly or in terms of aspects related to it It has been measured through various indicators, such as the regulatory framework, the convergence of ROA, the change in monetary base and assets (Gan, 2014; Gropp

Banking integration has been extensively studied using capital flows as a metric, including FDI, portfolio investments, and total cross-border asset flows (Arribas et al., 2020; Bouvatier & Delatte, 2015; Pérez et al., 2005) Bouvatier and Delatte (2015) introduced an alternative measure by leveraging the gravity equation framework from international trade analysis The gravity model captures the influence of bilateral differences in financial institutions or markets on investment allocation decisions via financial transactions (Martin & Rey, 2004; Okawa & Van Wincoop, 2012; Portes & Rey, 2005) These studies have provided valuable insights into banking integration based on the magnitude of cross-border asset claims (Arribas et al., 2020; Bouvatier & Delatte, 2015; Pérez et al., 2005).

In contrast to previous studies that only evaluated inward or outward financial flows, the trade openness index approach considers both directions of movement This provides a more accurate representation of the magnitude of financial flows and is therefore a better measure of banking integration.

In particular,Schoenmaker and Wagner (2013) evaluated whether cross- border banking in a country has a favorable overall impact when taking into account both inward and outward integration, and argue that countries with large banking centers are well diversified However, the new member states of the EU were vulnerable to contagion effects The EU banking system was weakly diversified, due to overexposure to the US and underexposure to Japan and China Nonetheless, this method only showed the net aspect of banking integration The discussions about global imbalance have shown that gross positions are essential to catch the degree of financial integration (Milesi-Ferretti & Tille, 2011; Shin, 2012) It was because net positions could hide massive gross positions.

What drives banking integration (cross-border banking inflows/outflows) is another important stream of research on international capital markets The previous theoretical literature emphasized the role of the development of the local financial system and macroeconomic conditions in orientating international capital flows (Levine, 1997) In contrast, Forbes and Warnock (2012) found that global risk and contagion are the main drivers of capital flow waves, while local conditions are less important Their result was consistent with Rey (2015), who found that the global financial cycle in capital flows co-moves with a measure of risk globally While global factors and contagion effects may explain the general patterns of the financial cycle in different countries, local factors may better explain its impacts and duration.

Adrian and Shin (2009) documented the growing importance of the capital market in the supply of credit in the 2000s In line with this evolution, Eichler et al (2017) used a gravity model and proposed that central bank transparency in the destination country increases cross-border claims The positive effect is only significant if the central bank is independent and operates in a stable economic environment Furthermore,Forbes and Warnock (2012), Bruno and Shin (2013), andPassari and Rey (2015) all suggested that global movements of international capital are highly associated with the global volatility index (MSCI), which is considered a proxy for the risk sentiments of global investors In particular,Bruno and Shin (2013) construct a structural model of global banking activities and describe how the risk sentiments of global banks affect international credit flows.

Importantly,Shirota (2015) proposed classifying the determinants of cross- border credit flows into two pillars: a global common factor and a regional common factor corresponding to “push factors” and a country-specific factor and other idiosyncratic factors correspond to “pull factors’ If push factors are the main reasons for fluctuations, global banking flows are driven by the centralized decisions of the home countries If local pull factors are the key drivers of fluctuations, then global banking flows are driven more by the total-optimization decisions based on the risk-adjusted relative profitability of each host location.

The literature on banking integration has been contributed much from the evidence of developed countries Although the ASEAN-6 could learn lessons from the EU, the level of integration among countries appears differently (Almekinders et al., 2015) Though the motivation for banking integration of this region exists, how to measure the degree and identify the key drivers of this process are still questions to be answered.

In general, this study contributes to the banking integration literature in the following aspects Firstly, based on the trade openness index and the method ofSchoenmaker and Wagner (2013), my study extends prior researches by employing two novel indicators to measure the degree of banking integration in terms of both net and gross positions Secondly, I get the first picture of the determinants of overall balanced banking integration degree in a banking system, which included the balanced and diversification degree Moreover, this study investigates, for the first time, some specific drivers for the banking integration in ASEAN-6, a bank-based financial system.

Method and data

Method

My approach has two parts I first measured two aspects of ASEAN-6 banking integration: banking openness, which is determined by inward and outward flows of banking capital; and the level of overall balanced degree based on the techniques suggested by2013 Next, I estimate the determinants of banking integration in the ASEAN-6 by using panel-data regression models with fixed effects My baseline model is:

BI(p) it = β 1L it +β 2X it +β 3G it +α i +α t+ε it where:

• The dependent variable BI is the degree of banking integration of country i at time t; BI is measured via two indicators p: BI(1) the Banking

Openness degree, and BI(2) the Overall Balanced degree.

• L it reflects the local macroeconomic variables.

• Xit reflects the banking system condition variables.

• Git reflects the global condition variables.

• and α i is a country specific effect, α t is a time effect and ε it is the error term.

To measure banking integration, I use two indicators: (1) the Banking Openness degree and (2) the Overall Balanced degree of Banking integration.

For a given country, cross-border banking flows can take place in two directions First, the banks of one country may invest their assets abroad. Second, banks from foreign countries may invest in assets of this country. The first type of cross-border banking is ‘outward‘ and the second one is

‘inward‘ (Pérez et al., 2005; Schoenmaker & Wagner, 2013).

The outward integration of a country is measured by the ratio of total outward assets to the total banking assets of this country Therefore, I have an index of outward integration of countryi, as follows:

OUT i = ∑ k,k 6={ i } f i,k a i where Outiis the outward integration index of countryi, aiis the total (local plus foreign) banking assets of country i, and f i,k is the total assets banks from countryihave in countryk The index of inward integration is similar, which measured by the total inward assets over the total banking assets So the index of inward integration of countryiis

Based on the Trade Openness index, I build the first indicator of banking integration: Banking Openness degree It is measured by the sum of inward and outward integration, so it is the total amount of inflow (bank assets of a given country that are owned by foreign banks) and outflow (the assets held abroad by banks of a given country), divided by the total banking assets of the given country The first indicator gives the degree of openness to banking integration of a particular country.

• OPEN i is the banking openness degree of countryi.

• OUT i is an index of the outward integration of countryi, andIN i is an index of the inward integration of countryi.

The second measure OVER focuses on balance as well as diversification aspects of banking integration.2013propose various ways of measuring banking integration The integration balance of countryiwas defined as follows:

Diversification plays a crucial role in enhancing the effectiveness of integration To assess this effectiveness in outward integration, an index can be constructed by examining the distribution of a country's outward investment portfolio across different countries This index captures the extent to which diversification is utilized to mitigate risks and maximize returns.

An index of the diversification of the outward investment of countryiis thus given by the Herfindahl Index (Woerheide & Persson, 1992):

2 where DIV i out is the index of diversification in the outward investment of countryi, andW i,j is the proportion of the portfolio of the outward investment of countryithat is placed in other countries I use the Herfindahl Index instead of the method presented by Schoenmaker and Wagner (2013), because I consider not only the banking integration in one region but also the banking integration of ASEAN-6 with the rest in the world For the reason that2013method is more suitable for intraregional banking integration, the Herfindahl Index is used to better reflect both in the ASEAN-6 and the rest of the world A similar index can also be constructed for inward investment:

2 where: DIV i in is the index of diversification of the inward investment of countryi, andW j,i is the proportion of the portfolio of the inward investment of countryithat is held by other countries.

Finally, the overall balanced index of integration of countryiis the average of the balance and diversification aspects.

BALi+DIV i out +DIV i in

This second indicatorOVER i will be one if banking integration of country i is perfect and zero if integration is very poor There are four levels: well balanced integration from 0.75 to 1; weakly balanced integration from 0.50 to 0.74; unbalanced integration from 0.25 to 0.49; and very unbalanced integration from 0 to 0.24.

Discussion of the explanatory variables

The first explanatory group includeslocal macroeconomic factors: GDP

(the size of the economy), exchange rates, and banking regulation policy Re- garding GDP in the context of integration, most of the studies take into account this variable (Asongu & De Moor, 2017; T Beck et al., 2016; Cerutti, 2015; Gani & Al Mawali, 2013; Kim, 2014) More intuitively, when GDP is more massive, cross-border capital flows should increase due to an increase in bank leverage and decrease in the banks’ default risk When I take the exchange rate into consideration, the flow-oriented model ofDornbusch and Fischer (1980) explain the inflow through the exchange rate channel When the exchange rate rises, the exchange rate is devaluated, the competitiveness of the business improves, the profit increases tend to attract capital inflows.This theory are also supported by many empirical evidence as in studies ofRughoo and You (2016),Gani and Al Mawali (2013),Teulon et al (2014) andBanerjee et al (2016).

Concerning the banking regulation policy, Eichler et al (2017) used a gravity model and proposes that central bank transparency in the host country increases cross-border claims Furthermore, determinants that affect cross- border bank activities include institutional quality and the stringency of bank regulation also affect cross-border banking Papaioannou (2009) found that higher institutional quality seemed to attract more cross-border bank flows.

On the contrary, the stringency of bank regulation performs as a push factor, which pushes cross-border bank activities toward laxer regulatory regimes. There are some empirical evidence for such regulatory arbitrage in cross- border bank flows (F Bremus & Fratzscher, 2015; Houston et al., 2012) and in cross-border bank acquisitions (Karolyi & Taboada, 2015) Bruno and Shin (2014) also mentioned that a growing openness to foreign capital flows un- derlies the economic freedom of a particular country.

The present study uses WGI (World Wide Governance Indicators) Database of the World Bank as a proxy for banking regulation This dataset has also been used widely in previous institutional studies, such asBarro (1995),Gani (2011), Law et al (2013), and Fayissa and Gill (2016) This index takes on values between -2.5 to 2.5, and includes six broad dimensions of governance: Voice and Accountability, Political Stability and Absence of Violence/Terrorism, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption Instead of using individual dimensions as previous, this research carried out a principal component analysis (PCA) to convert these six dimensions into a common dimension, to estimate the general regulatory quality, with a higher value implying better institutional and regulatory quality.

The second group of variables is banking system conditions: performance, competition, and size Reinhardt and Riddiough (2015) documented that average Return on Equity (ROE) of resident banks in intragroup funding has the highest growth Furthermore,Bruno and Shin (2014) found that the profitability of the local banking system is positively linked with bank-to- bank funding Regarding banking competition,Pérez et al (2005) concluded that countries where banking systems are more concentrated, the banking systems are less attractive for foreign banks In the meanwhile, more concentration enhances the accumulation of resources, which makes expansion abroad easier The competition of banking system is also found as an important factor of integration in the study ofAgoraki et al (2020) Finally, the bank size of each country measured as total banking asset is also found in many previous empirical studies (Zhang & Matthews, 2019).

Data

The data employed in this section are drawn from several public sources. Cross-border banking flows are taken from the locational banking statistics of the Bank for International Settlements (BIS) The ASEAN is well covered with 6/10 countries: Vietnam, Thailand, Indonesia, Malaysia, Philippines, and Singapore (these countries account for more than 95% of the GDP of the ASEAN) Because most of these countries are not the reporting countries, claims and liabilities were collected in those cases in which the ASEAN-6 were considered as the counter-parties to reporting countries in BIS Total assets of the consolidated banking sector of each ASEAN-6 country are taken from the Central Bank of each country as well as the BankScope database (Orbis BankFocus) The cross-border banking and total assets enable us to calculate the indicators for individual countries.

Various data sources were utilized for this study Local GDP and real global GDP were sourced from the World Bank's World Development Indicator, while return on book equity and banking sector concentration were obtained from its Global Financial Development database Regulatory quality in each country was assessed using indicators from the World Bank's Worldwide Governance Indicators Data Exchange rates were collected from the IMF's International Financial Statistics database, and MSCI Index data was retrieved from DataStream Tables 2.1 and 2.4 present a summary of all variables and descriptive statistics, respectively.

The data are on a quarterly basis and cover the period from 1996Q4 to 2016Q4 After suffered from the regional currency crisis in 1997, ASEAN-6 adopted the ASEAN Vision 2020 at the end of 1997 that set concrete goals in the areas of politics, security, economy, society, culture and external relations.

It was a significant document for the development of the Association, laying the foundations for the formation and realization of the goals of establishing the ASEAN Community For the annual data, I used linear interpolation to convert to quarterly, due to the fact that these annual variables in this study do not fluctuate significantly in the study period Moreover,Noor et al (2014) found that the linear interpolation method provides a very good fit.

TABLE2.1: Summary of all variables

Variable/Code Description Source Expected sign Dependent variables:

This index gives an indication of the degree of openness to banking integration of a particular country

Computed by the authors using the data from BIS, Central Banks

This index gives an indication of the degree of balance and diversification to banking integration of a particular country

Computed by the authors using the data from BIS, Central Banks

Natural logarithm of Gross domestic product (constant 2010 USD)

World Bank, World Development Indica- tor

Foreign Exchange (FX) Natural logarithm of official exchange rate (local currency units relative to the U.S dollar

Regulatory Quality (REG) Estimate of general regulatory quality I employed the a principal component analysis (PCA) to combine six broad dimensions of governance

World Bank, The Worldwide Gover- nance Indicators

Bank Size (SIZE) Natural logarithm of total assets in million US$ Central Bank reports,

Bank Profits (ROE) Average Return on Equity (Net Income/Total Equity)

World Bank, Global Financial Develop- ment

Banking Concentration (CON) Assets of three largest banks as a share of assets of all commercial banks

World Bank, Global Financial Develop- ment

The TED Spread (TED) The difference between the three-month LIBOR and the three-month T-bill interest rate

World Real GDP (GDPW) Natural logarithm of World Real Gross domestic product (constant 2010 USD)

World Bank, World Development Indica- tor

MSCI World Index (MSCI) A broad global equity index that represents large and mid-cap equity performance across 23 developed countries

Results and Discussion

Banking Integration in ASEAN-6

Before estimating the determinants of banking integration, I present a pre- liminary picture of the banking integration in the ASEAN-6 Figure2.1rep- resents the aggregate evolution of the foreign claims and liabilities of the

Note: Foreign claims and liabilities in ASEAN-6 from 1996 to 2016, adjusted by US GDP deflator index from WorldBank.

FIGURE 2.1: Foreign claims and liabilities in ASEAN-6

ASEAN-6 countries vis-à-vis all countries during the 1996–2016 period Fig- ure2.1shows the fast expansion in international banking activities from 1996 to 2016; banks’ foreign activities were large and had been growing over time.

In the last quarter of 1996, the foreign claims totaled 489,717 millions of USD and increased by 180% from 1997 to 2016.

Note: IDN: Indonesia; MYS: Malaysia; PHL: Philippines; SGP: Singapore; THA: Thailand; VNM: Viet Nam.

Source: Authors calculated from BIS, Central Bank reports and BankScope.

FIGURE2.2: Banking Openness degree of ASEAN-6

During 1996–2005, the claims and liabilities in ASEAN-6 slightly decreased This reduction during the first stage was the consequence of the 1997-1998 Asian financial crisis Thailand and Indonesia, which were the countries most affected by this crisis, experienced a severe downturn in foreign liabilities However, cross-border banking in ASEAN-6 increased substantially after 2008 When the cross-border banking in the world and Europe decreased significantly because of the Global Financial Crisis 2007-2008 (F. Bremus & Fratzscher, 2015), it can be observed that claims against ASEAN-

6 tended upwards It then suggests that the development of cross-border banking has been quite heterogeneous around the world.

However, these countries are also similar in that their liabilities (inflow)

T ABLE 2.2: Descriptive statistics on Banking integration for each ASEAN-6 country

Statistic N Mean St Dev Min Pctl(25) Pctl(75) Max

Overall Balanced Degree (OVER) 486 0.77 0.08 0.49 0.72 0.83 0.91 exceeded the claims (outflow): they have all been recipients of capital (including Singapore) since 2010 and are considered to be potential investment destinations In the descriptive table2.2, the mean of inflow of ASEAN-6 was higher the one of outflow, respectively 0.22 and 0.15.

T ABLE 2.3: Pearson correlation matrix analysis

OPEN OVER GDPL FX REG ROE SIZE CON TED GDPW MSCI

Notes: OPEN: Banking Openness Degree; OVER: Overall balanced integration degree; GDPL: Gross Domestic Product; FX: Foreign Exchange; REG: Regulatory Quality; SIZE: Bank size; ROE: Bank profits; CON: Banking concentration; TED: the TED spread; GDPW: World real GDP; MSCI: MSCI World Index.

When considering total banking assets in each country, Figure2.2shows the significant decrease in banking openness of all ASEAN-6 countries for 1997–2008, remaining at a very low level compared with its peak The expansion of banking assets in ASEAN-6 outweighed the development of cross- border banking It shows that although cross-border banking increased tremendously, the degree of banking openness in ASEAN-6 remained low and slightly decreased in the research period The banking openness degree of Singapore, where the financial and banking system was the most developed in ASEAN-

6, was far greater than the others The mean of Openness Degree of Singapore remained at 0.76, while the rest remained around 0.23 and 0.4.

For the overall balanced degree, Table2.2provides summary statistics of the indicators of the individual ASEAN-6 countries The mean of the overall degree remains at 0.77, so the average banking integration at ASEAN-6 reached the well-balanced level Figure 2.3 suggests that the overall integration has changed little over the research period However, all balanced

Note: IDN: Indonesia; MYS: Malaysia; PHL: Philippines; SGP: Singapore; THA: Thailand; VNM:Viet Nam Source: Author’s calculations.

FIGURE2.3: Overall balanced degree of Banking integration in

TABLE2.4: Descriptive statistics for banking integration.

Statistic N Mean St Dev Min Pctl(25) Pctl(75) Max

During the analyzed period, the banking integration levels of the six ASEAN nations displayed heterogeneity Indonesia exhibited the lowest integration (mean of 0.69, often weakly balanced), while Singapore maintained the highest (mean of 0.82) Thailand and Vietnam experienced significant fluctuations between weakly and well-balanced integration Notably, none of the ASEAN-6 countries reached the unbalanced or very unbalanced integration levels However, the expansion of liabilities outpacing claims caused a decline in the overall balanced integration degree, particularly following the global financial crisis in 2008.

CH CL DE DK ES FI FR

FIGURE 2.4: Exter- nal diversification by country

IM IE IT JE JP KR

LU MO MX NL SE

FIGURE 2.5: Exter- nal diversification of ASEAN-6 Source: BIS locational banking statistics.

The ASEAN-6 banking system was widely diversified, with 30 counter- parties around the world The mean of outward and inward diversification was approximately 0.80 (Table2.4) It can be seen in Figure2.4and Figure2.5 that the banking system in ASEAN-6 had a massive exposure to Hong Kong,Japan, the United Kingdom, the European Union, and the United States At the same time, ASEAN-6 banks had very little banking interaction with SouthAmerica and Africa.

Estimation Results

The determinants of banking integration were estimated using fixed effects estimators with Openness Degree and Overall Balanced Degree as dependent variables (Tables 2.5 and 2.6) Random effects estimators were also employed, but the Hausman specification test indicated systematic differences between fixed and random effects models, verifying the efficiency of the fixed effects estimator in this context.

In the table 2.5 and table 2.6, the columns (1), (2), and (3) are used to pre-exam the results of the models, which are run for the different groups of explanatory variables with both country and period fixed effects The column (4) is the completed models which are run for all explanatory variables with fixed effects In what follows, I focus on the analysis of results obtained from Fixed Effects estimations from column (4).

Regarding the drivers of the Banking Openness degree (Table 2.5), I find that the degree of openness is positively associated with GDPL, FX, CON, TED, and MSCI Among these, GDPL has the strongest positive impact, with a coefficient of 0.8329 at 1% confidence level From the other side, my results show that the Openness degree of the ASEAN-6 banking system is negatively associated with REG, ROE, SIZE, and GDPW More precisely, GDPW has the largest negative coefficient of -1.5190 at 1% confidence level.

When looking at the determinants of the Overall Balanced Degree (Ta- ble 2.6), my results show that GDPL, ROE, CON, and TED have positive impacts on the Overall Balance degree The highest and lowest coefficient is GDPL and ROE, with the coefficient of 0.1450 and 0.0004, respectively.

T ABLE 2.5: Determinants of Banking Openness Degree

Country fixed effects Yes Yes Yes Yes

Time fixed effects Yes Yes Yes No

F Statistic (df = 3; 397) (df = 3; 397) (df = 6; 394) (df = 9; 471) Note: ∗ p c ) +γZ it + ε it (3.7) where the dependent variable LERNER is a banking competition measure (the Lerner index),αis a fixed effect, the regressorBI it is Banking integration, andI ( )is the indicator function,q it is the threshold variable, c is a threshold parameter and Z is the group of control variables Theεiterror is assumed to be independent and distributed identically, with a varianceσ 2 zero mean and finite The results in the model3.7are divided into two regimes, depending on whether the threshold variableqitis smaller or greater than the threshold parameter c The model3.7can be expanded and tested with much more the number of regimes.

Threshold variables are recruited from the previous studies’ suggestions.

AsAllen, Beck, et al (2011) concluded that the effect of integration depends on its degree, so in this research, the balanced degree (BAL), the overall balanced degree (OVER, including the diversification aspects) are used as the threshold variables Jeon et al (2011) found the impact became greater,when international banks enter less concentrated markets in the host emerging country; andClaessens (2006) concluded there is a need to approach the issues of cross-border banking and competition differently by level of development of the regulatory and supervisory capacity So that I also employ

Regulatory Quality (RQ) and concentration (CON) serve as threshold variables, indicating the regulatory environment and banking system structure Conversely, balance (BAL) and turnover (OVER) measure the flow of capital in and out of a country, reflecting economic conditions By analyzing these indicators, investors can assess the health and stability of financial markets.

Table 3.7 provides estimates of the parameters of the PTR models with four regimes and the related t-statistics based on standard errors adjusted for heteroskedasticity I find that the test for the three-threshold F is highly significant, with a bootstrap (300 simulations) P-value |t|) lag(log(ZSCORE),1) 0.2035 0.0772 2.6378 9.51E-03

Valid Obs = 126; Missing Obs = 0; Degrees of Freedom = 114

Conclusion

This chapter analyses the impacts of three aspects of banking integration on the banking stability in the ASEAN-6 in the period 1996-2018 Moreover, the contagion risk of banking instability and economic uncertainty information through cross-border linkages among banking systems was also investigated.

The results suggest that the effect of integration in international interbank markets on stability is heterogeneous Firstly, regarding capital banking integration, while the banking openness degree hurts banking stability, the overall balanced degree has a positive impact This means the more inter- linkages in the banking networks, the less banking stability However, a more balanced and more diversified country between the inflow and outflow banking capitals can benefit a more stable banking system Secondly, the foreign banking participant which was used as a proxy for physical banking integration has a positive relationship with the banking integration The foreign banks with competitive skills and technology helped to improve the local banking performances and reduce the banking default probability.

Moreover, the empirical test also shows the effect of banking integration on credit risk and liquidity risk The banking openness degree increases the liquidity assets in the local banking system, encouraging these banks to take more new risks So, the non-performing loans would be increased as a result, and the banking systems would be less stable However, the overall balanced degree and the foreign participants have the opposite effects on the credit risk and liquidity risk, which help the local banking system more stable.

Furthermore, when taking the network structure into account, I find evidence that ASEAN countries that face foreign interbank exposures to more stable counterparties tend to experience a shift toward a more stable banking system This highlights that bilateral linkages with stable banking systems can have a beneficial effect on stability, reducing credit risk, and liquidity risk On the contrary, the instability of the foreign banking system can trans- mit to the local system through banking connections However, I find that economic uncertainty information does not spread and affect banking stability via the cross-border linkages.

The different impacts of three aspects of banking integration, as well as the contagion risk on banking stability, suggest a trade-off between stability and systemic risk This recommends that policymakers should thus take advantage of the benefits of international risk-sharing with the healthy banking systems; while restraining costs when connecting with the less stable ones.

It has to be carefully considered in the context which ASEAN want to boost their financial integration degree In addition, the empirical results suggest that the regulation quality and financial freedom should be enhanced to contribute to the stability of the banking system.

Appendices

TABLE4.7: Data distribution by country and year

Year ID MY PH SG TH VN Observation by year

T ABLE 4.8: Pearson correlation matrix analysis

ZSCORE FOR OPEN OVER REG GDPG FFI CRISIS TED COST CON

TABLE4.9: List counter-parties of ASEAN-6 banking systems

TABLE4.10: T.Test and F.test for actual and predicted values value df p-value 95 percent confidence interval

Notes Paired t-test: alternative hypothesis: true difference in means is not equal to 0. Sample estimates: mean of the differences 4.1633e-16

F test to compare two variances: alternative hypothesis: true ratio of variances is not equal to 1 Sample estimates:ratio of variances 0.6894

TABLE 4.11: Metrics/ Criteria measuring the quality of a regression model

Score Value Score Value Score Value

Notes: MAE: Mean Absolute Error, MAPE: Mean Absolute Percent- age Error, MEDAE: Median of Absolute Errors, MEDSE: Median of Squared Errors, MSE: Mean Squared Error, RAE: Relative Absolute Error, RMSE: Root Mean Squared Error, RSQ: R-Squared, SAE: Sum of Absolute Errors, SSE: the Sum of Squared Estimate of Errors, Pear- sonR: Pearson, KendallTau: Kendall’s Tau, SpearmanRho: Spearman’sRho.

The previous chapters focused on analyzing the benefit and costs of the different forms of banking integration in Southeast Asian countries’ banks The outstanding advantage of banking integration is to promote competition, risk diversification, and increase risk-sharing possibilities However, cross-links can be detrimental and cause feedback effects, especially the potential for capital flow volatility and contagion risk And these above effects can be different from the diverse forms of banking integration In particular, chapter

2first developed the extended measures of banking integration and investigated the determinants of cross-border capital flows in this area In ASEAN, although cross-border exposure remains relatively low, foreign banks have started to play an important part as active investors during the last two decades Then in chapters3, I analyzed the heterogeneous impact of banking integration on the banking competition in ASEAN And chapter4estimates the gains and risks of banking integration associated with the stability of the banking system, analyzes what affects the trade-off between risk diversification and contagion risk, and focusing on the policy implications of the findings.

This chapter, which concludes my thesis on bank integration in ASEAN, is organized as follows: Section 5.1 summarises the three empirical chapters of the thesis: the motivations, research questions, main findings, and the research contributions Section5.2discusses and highlights the practical implications of the thesis findings Finally, section5.3 signifies key suggestions for future work.

Summary of the empirical essays

This thesis mainly addresses three issues and contributes substantially to the contemporary literature from different perspectives.

The first essay (chapter 2) develops various extended measures of the banking integration in ASEAN-6 through using the two indicators: BankingOpenness degree and Overall Balanced degree Although the cross-border banking activities in ASEAN-6 expanded dramatically in 1996-2016, the Bank- ing Openness degree remained low and tended to decline However, theOverall Balanced degree indicated that the ASEAN-6 banking systems’ banking integration was highly diversified and quite well-balanced The descriptive statistics demonstrate that ASEAN-6 members are heterogeneous due to their huge differences in income, institutional, and economic features But these countries have several similarities in the level of banking integration(both Openness and Overall balanced indicators): all of them (including Sin- gapore) are the recipients of capital and are regarded to be lucrative investment havens Moreover, this first essay also contributes to the literature,particularly on developing and emerging ASEAN economies by identifying the determinants of banking integration It is essential to define these determinants since they contribute to the countries and circumstances in which banking integration could be supposed to occur — or the degree to which it might occur and affect the local financial systems Many of the determinants of cross-border banking identified in the literature are as expected

ASEAN banking integration is influenced by both push factors (source countries) and pull factors (recipient countries) Global economic conditions (e.g., TED spread, World Real GDP, MSCI World Index) serve as push factors Pull factors include macroeconomic characteristics (GDP, forex, regulatory quality) and banking system features (profits, size, concentration) These factors contribute to the enhanced integration of ASEAN banking, highlighting the significance of global economic factors and national characteristics in this process.

Second essay (chapter3) concerns the effect on competition The competition- stability view suggests that competition leads to greater stability However, the expansion of cross-border banking raises some questions about its effect on competition Reviewing the empirical literature, I find that there is still a gap related to the link between banking integration and competition, especially in the capital integration aspect Moreover, just a few research has explored the recent evolution of ASEAN banking competition under the impact of the ongoing integration in the banking markets of the region and the recent political progress towards the establishment of a common economic union My analysis, therefore, follows on from these previous studies and provides a critical framework to examine the expected changes in the competitive performance of the banking systems of these countries as progress progresses towards the integration of the regional banking market An important research question I have addressed in the second essay is whether the increase in bank integration has increased the level of competition in theASEAN banking industries My findings indicate that banking integration aspects have a heterogeneous effect on competition in the banking market.

This thesis adds to existing knowledge by exploring three aspects of banking integration: the channel of capital integration (degree of openness and degree of balance overall) and the channel of physical integration (participation of international banks) The metrics in the first essay were employed to measure the banking integration degree In order to calculate banking competition, I used the conventional Lerner index in the main test and adjusted the Lerner index - Booner index as a robustness test On the one hand, although the level of competition for banks has risen as a result of greater openness to bank resources, there appears to be a negative correlation between the overall level of balance and competition The physical presence of foreign banks, on the other hand, causes a decline in bank competition, which can be restricted by an effective regulatory framework By employing the polynomial and threshold regressions, another important finding of this study was that the degree of banking openness considerably improves banking competition, but somehow the impact is non-linear (U curve) and heterogeneous in the various regimes of the balance integration degree, regulatory efficiency, and capital markets concentration If an ASEAN country is able to achieve a higher balance of capital flows and remain well regulated,openness in the banking system would have a more advantageous competitive effect Besides that, as a robustness test, two alternative competition metrics (Adjusted Lerner Index and Boone Indicator) have been adopted;the result of the primary equation does not change I recognize that only inflow and inward diversification have an effect on competitiveness while utilizing the components of capital integration Such results will allow us to clarify the circumstances and types in which banking integration improves competition It illustrates the significance of recognizing the heterogeneous impact of the three different aspects of banking integration and how did their chances in various regimes In addition, my research also suggests key policy implications for regulatory quality because evidence indicates that the relationship between bank integration and quality regulation plays a vital role in bank competition Therefore, policymakers in South East Asian economies need regulations with a high-quality design, implementation, and regulatory regime review to achieve good regulatory outcomes.

The third essay (chapter 4) of this thesis analyses the impacts of three aspects of banking integration on the banking stability in the ASEAN-6 in the period 1996-2018 Moreover, through the spatial model, the contagion risk of banking instability and economic uncertainty information through cross-border linkages among banking systems was also investigated The findings indicate that the impact of integration on stability in international inter-bank markets is significant but quite different under the banking integration aspects First, with capital banking integration form, while the degree of banking openness has an adverse impact on banking stability, the overall degree of balance has a beneficial effect This implies that the more financial networks are interlinked, the less financial stability there is How- ever, a country with more balance and more diversified between the inflow and outflow banking capitals can have a more stable banking system Sec- ondly, the foreign banking participant who was used as a proxy for physical banking integration has a positive relationship with the banking integration. The foreign banks with competitive skills and technology helped to improve the local banking performances and reduce the banking default probability. Moreover, the empirical test also shows the effect of banking integration on credit risk and liquidity risk The banking openness degree increases the liquidity assets in the local banking system, which will encourage these banks to take more new risks So, the non-performing loans would be increased as a result, and the banking systems would be less stable However, the overall balanced degree and the foreign participants have the opposite effects on the credit risk and liquidity risk, which help the local banking system more stable Furthermore, when considering the network structure into account,

Foreign interbank exposures to stable counterparties contribute to banking system stability within ASEAN member nations Bilateral connections with sound banking systems can enhance stability, mitigate credit and liquidity risks, while instability in foreign banking systems can be transmitted locally through these connections Conversely, economic uncertainty does not propagate via cross-border linkages, leaving banking stability unaffected.

Practical Implications

The integration of ASEAN banks could pave the way for higher financial internationalization By encouraging ASEAN banks to gain expertise in operating in a more dynamic cross-border environment, ASEAN bank integration can be seen as an initial phase toward greater financial internationalization.The results in the chapter2illustrated local regulatory quality, as well as domestic banking system conditions, could play as the significant drivers of the enhanced regional banking integration in ASEAN So, the improvement of the domestic banking sector and expanded integration of the banking sector will be able to continue in parallel in the future The creation and execu- tion of policies promoting an integrated banking system that is both effective and robust is a crucial task for policymakers and supervisors in ASEAN.The degree of financial integration will be increased by the harmonization of regulatory and supervisory environments As financial industries grow and integrate, the supervisory capability has to follow with increasingly diverse cross-border operational banking institutions Keeping on top of financial integration, therefore, means stronger global regulations, such as the changes envisaged in Basel III However, regulatory fragmentation may result from the various current attempts aimed at strengthening regional integration In other words, if there is insufficient cooperation between ASEAN and other regional integration initiatives, contradictory regulations can emerge.

The development of legal regulations according to international practices and commitments is indispensable in the globalization process in all aspects of the world economy to create a standardized and unified international environment The legal system must be transparent and consistent with international practices, institutions, regulations, and integration commitments The legal system must also ensure equality and openness for the interests of all countries participating in global economic activities together.

It is necessary to have a good mechanism and qualifications to manage and operate the legal system, creating conditions for smooth, regular, fair, and stable financial and banking operations Management qualifications must meet the requirements of enforcing and protecting the fairness of legal regulations, ensuring the entire banking system’s valid operation Mechanisms for banking inspection and supervision must be developed and implemented effectively.

When reflecting on the pace of liberalization of the ASEAN financial market in chapter2, the issues raised by the different stages of the economic development of ASEAN countries need to be considered carefully The results show that the local macroeconomic characteristics in ASEAN have significant associations with banking integration degree In terms of this, ASEAN members’ vigilant and careful process of moving forward together is reason- able Moreover, the ASEAN / AEC system leaves open the prospect that,with financial convergence, more mature economies will move further It will benefit these countries to lift protectionist obstacles to regional banking integration until appropriate protections are in effect.

Regarding the results of the chapter 4, the contagion risk and systemic risk arising from banking linkages can be mitigated by enhancing the regulatory environment The regulatory environment in the ASEAN needs to be enhanced via more vigorous collaborative efforts and active engagement.

It is essential to understand the advantages of a regional and coordinated approach to systemic risk identification and management To eliminate the disruption of regionally involved banks, regulatory authorities in the region should collaborate by overseeing banks, exchanging information, and better realizing the existence of a systemic threat ASEAN policymakers should be timely and coordinated in their efforts and decisions It was essential to de- termine other more formal and informal regional regulatory and supervisory cooperation/coordination mechanisms Current experience in the EU shows the challenge of allowing financial institutions to operate freely in a region while encouraging national regulators to control regional banks’ activities within national jurisdictions and give lessons on the need to pay much attention to the regulatory side the integration of regional banks.

Chapter4also shows that the different impacts of three aspects of banking integration, as well as the contagion risk on banking stability, suggest a trade-off between stability and systemic risk This recommends that policymakers should thus take advantage of the benefits of international risk- sharing with the healthy banking systems; while restraining costs when connecting with the less stable ones It has to be carefully considered in the context which ASEAN want to boost their financial integration degree In addition, the empirical results emphasized the importance of enhancing the regulation quality and financial freedom to contribute to the banking system’s stability.

Moreover, regional authorities must better understand in order to de- cipher possible channels of systemic risk and financial contagion successfully The probability of a ’common lender’ impact is increased, given the increased concentration of lenders in the region So that, the approach to decrease this form of potential threat to banking stability is to diversify the financing sources for ASEAN and to assess the vulnerability of the various regional economies by managing the vulnerability of the region to joint creditors and certain banks which are highly exposed to countries in the area In that case, ASEAN members also have to be able to exchange data and knowledge more quickly to boost their ability to react to these risks.

In Chapter 4 of the report, it is highlighted that banking integration within ASEAN can mitigate liquidity risk This strategy involves allowing banks from other ASEAN member states and non-ASEAN countries to establish operations within local banking systems, thereby providing additional liquidity and enhancing financial stability By promoting cross-border banking activities, the ASEAN region can reduce its exposure to liquidity shortfalls and foster a more resilient financial ecosystem.

US dollar liquidity, the ASEAN’s funding sources can be diversified and reduce the contagion threat by eliminating the "common lender" effect More- over, ASEAN countries should be weaning themselves away from reliance on the US dollar It could be accomplished by establishing a regional repo market in regional currencies to minimize regional banks’ borrowing in US dollars, as well as by raising the number of high-quality reserves denomi- nated in regional currencies to provide regional banks with reliable sources of local currency financing For instance, in order to get a facility that ensures a regular supply of local currency liquidity, regional central banks could de- cide to share cross-border collateral in the form of government and corporate securities from within ASEAN+3 It is also possible to encourage the growth of the local currency capital market by implementing a framework of currency swaps in regional currencies to have a support system against liquidity deficits in the US dollar and the threats related to short-term borrowing within the ASEAN.

Increasing banking integration could be lead to the elimination of incentives towards equal competition between banks on an international level. Financial capacity (capital factor) is one of the most fundamental and critical factors in banking operations in assessing each bank’s autonomy and competitiveness As I found in chapter3, it can be said that financial capacity is the prerequisite resource for the development and competitiveness of the commercial banks in ASEAN By considering the importance of financial capacity, it is possible to draw requirements for financial resources in ensuring the viability as well as the development of the ASEAN commercial banking system in the current deep integration and fierce competition: Firstly, to ensure the comparative position and competitiveness of domestic commercial banks compared to the foreign banks, the domestic banks must have increased the equity to compete with the foreign banks It will help ensure stable deposit capital mobilization and create confidence in domestic banks’ strength, increasing high position and prestige in the conditions of integration to withstand "turbulent" from the foreign banks and the upcoming harsh competitive environment Second, the financial capacity must meet the capital requirements and capital adequacy according to international regulations to ensure stable and safe banking operations, and at the same time, create confidence for domestic investors Third, to ensure the ability to fully meet the increasing demand for capital in terms of quantity and quality from a rapidly growing economy As the main capital supply channel today, this requirement becomes more severe and more critical for commercial banks.

Capital scarcity can have far-reaching consequences for the economy, including stunted growth To mitigate these risks, it is crucial to prioritize investments in modern banking technology and employee training to facilitate seamless banking operations within an integrated ecosystem.

Finally, it is vital for the ASEAN policymakers to deeply understand the heterogeneous effects of the banking integration’s different aspects on the competition and banking stability, as the result of chapters3and 4 For example, while the channel of capital integration (degree of openness) can boost the competition but may cause harm to the ASEAN banking system’s stability, the channel of physical integration has the inverse impacts How- ever, these unfavorable impacts could be restricted by establishing an effective regulatory framework Decisions can be implemented more efficiently and successfully through intense awareness of the influences for various aspects of banking integration.

Suggestions for future research

Future directions related to the research limitations are proposed as follows.

First, a potential project may involve constructing a comprehensive, accurate measurement of banking regulations quality This thesis could be expanded if variables reflecting direct banking regulations are available, rather than using the national environment as a proxy.Barth et al (2013) offered additional datasets and measures relating to bank regulatory and supervisory policies of 180 countries in the period 1999 and 2011 However, this dataset is based on survey responses and remains a lot of missing data because it is only conducted in 4 years in the research period.

More importantly, the overall picture of the banking integration of ASEAN-

6 will be more apparent if there are sufficient reports of ASEAN countries to the BIS At this time, only four countries Singapore, Indonesia, Malaysia, and the Philippines, are reporting countries for BIS Statistics So in this thesis, claims and liabilities were collected in those cases in which the ASEAN-6 were considered as the counter-parties to reporting countries in BIS.

Foreign banks exhibit varying market power due to their entry strategies Research suggests that greenfield entry, where banks establish operations from scratch, results in lower market power Conversely, foreign banks entering through acquisitions possess greater market power This differentiation stems from several underlying factors that impact their presence and influence within the domestic market By examining the impact of different bank entrance types, we can gain insights into the role of foreign banks in shaping the competitive dynamics of the financial sector.

In addition, it would be interesting if we can distinguish intra-region banking integration (ASEAN countries) and banking integration with the rest of the world (non-ASEAN countries) So that we can compare their effects on the performance, competition, and risk of the local banking system. But in this case, it requires a complete dataset about the bank linkages among the ASEAN countries and with the non-ASEAN countries.

Further research regarding the role of Fintech on banking integration would be worthwhile FinTech is reshaping the entire banking system from a branch-specific phrase to numerous digital channels (Acar & Çıtak, 2019).

It helps to decrease the bank’s reliance on its brick and mortar branches to operate, which could accelerate the banking integration process While financial institutions around the world have been widely debated about the fintech subjects, there are just a few research about how banks can develop a framework to adapt with fintech and how fintech affects banking integration process.

This research also offers other useful suggestions The banking integration measures in this thesis can be applied to calculate the banking integration degree in future research, which is expected to outperform the traditional indicators Expanding the different markets and regions will provide a bigger picture and comparison among their banking integration level.

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