Research in International Business and Finance 47 (2019) 487–500

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Research in International Business and Finance

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Full Length Article

Assessing the degree of financial integration in ASEAN—A

T
perspective of banking competitiveness
Tiantian Zhanga, , Kent Matthewsb
⁎

a
Nottingham University Business School China, University of Nottingham Ningbo China, Ningbo, China
b
Cardiff Business School, Cardiff University, Cardiff, UK

ARTICLE INFO ABSTRACT

JEL classification: This paper assesses the degree of financial integration of the ASEAN economies by investigating
G21 the evolution and convergence properties of banking market competitiveness over the period
G28 1994–2016. Banking market competitiveness is modelled by the Panzar-Rosse (PR) reduced-form
L22 revenue model, and the estimated measures of competitiveness (H-statistics) are then used to test
Keywords: for β- and σ-convergence. Greater financial integration is not necessarily competition enhancing,
Financial integration however we find evidence of convergence toward a monopolistic competitive market structure
Banking competitiveness across countries. We find that competitiveness weakened and the speed of convergence slowed
Convergence
following the Asian Financial Crisis and the Global Financial Crisis, but in general the policy of
H-statistics
financial integration has been moderately successful.

1. Introduction

When the Euro was launched in 1999, the notion of a similar currency union in the ASEAN bloc was raised and became a long-
term strategy for policy makers,1 with the objective of promoting trade and investment across the member countries by reducing
cross-border transaction costs and exchange rate risk.
In most ASEAN countries, the banking system is still the principal vehicle of financial intermediation and the channel of monetary
policy pass-through. However, there have been significant structural changes since the 1997 Asian crisis and the global financial crisis
of 2008–2009, involving privatization, deregulation, M&A, foreign firm entrance, as well as market integration (Khan et al., 2016).
The banking market has faced two opposing forces, namely increased competition through greater foreign bank penetration, regional
market integration, and liberalization;2 and increased concentration from bank consolidation, which may increase market power. The
main research objectives of this paper is to investigate the extent to which financial integration has resulted in the convergence of the
banking market in the ASEAN five founder countries (ASEAN-5) to a common stage of competitiveness.3 The underlying assumption

Corresponding author.
⁎

E-mail address: Tiantian.Zhang@nottingham.edu.cn (T. Zhang).

1
Regionalism and economic integration also exists in larger geographical areas, e.g. the East Asia area, including all ASEAN countries plus
People’s Republic of China, Japan, South Korea and Taiwan. However, among the alternative geographical areas, ASEAN has the greatest possibility
for a truly integrated financial market and regional currency arrangement (Bayoumi and Mauro, 2001).
2
The ASEAN Banking Integration Framework (ABIF) of 2014 allow any two countries among the five “older” ASEAN countries to conduct
bilateral agreements for greater access for Qualified ASEAN Banks (QABs), and also requires member countries to further liberalize their banking
markets and achieve a semi-integrated banking market by 2020.
3
Indonesia, Malaysia, the Philippines, Singapore and Thailand. The 5 countries together account for 87% of the total GDP, 73.51% of the total
population of ASEAN, and is a representative sample of the ASEAN.

https://doi.org/10.1016/j.ribaf.2018.09.009
Received 2 April 2018; Received in revised form 14 September 2018; Accepted 21 September 2018
Available online 29 September 2018
0275-5319/ © 2018 Elsevier B.V. All rights reserved.
T. Zhang, K. Matthews Research in International Business and Finance 47 (2019) 487–500

is that if the regional coordination toward financial integration has been effective, it should have propelled the competitive structure
of the member countries’ banking market toward a level that is compatible with each other. Individual banks would then be better
prepared for a more liberalized regional market under full integration. Economic efficiency will also be improved through compe-
titive price reductions. Therefore, the convergence properties of banking market competitiveness could serve as an indicator of
banking market integration. A similar notion has been used to study financial integration in the EU (Weill, 2013; Casu and Girardone,
2009; Andrieş and Căpraru, 2014), but to the best of our knowledge, no similar research has been conducted at institutional level for
ASEAN countries. The present study fills this gap by providing a convergence analysis of ASEAN-5’s banking market competitiveness
over the period (1994–2016). The degree of competition in one country’s market is measured by the H-statistic, obtained from the
Panzar-Rosse (PR) reduced-form revenue model.
The rest of this paper is organised as follows. Section 2 reviews the literature on economic and financial integration indictors, and
the measure of banking market competitiveness. Section 3 outlines the methodology of the Panzar-Rosse (PR) model along with some
recent improvements and the test procedures for β- and σ- convergence. Section 4 provides brief information on the data. Section 5
presents some results using price-based measures of market integration, the estimated results for H-statistics using the PR model and
an analysis of the convergence properties of ASEAN banking markets competitiveness. The final section concludes and summarises
our findings.

2. Related literature

Typically, the degree of financial integration is assessed by either “quantity-based” indicators, such as increasing cross-border
lending activities and increasing share of investors’ holding of non-domestic assets, or more often by “price-based” indicators, which
are either computed or model-based measures of evolution and dispersion in assets returns based on their geographic origin. A
declining trend in dispersions, i.e. a converging trend, is a signal of financial integration as the assets returns should be more
influenced by common factors rather than country-specific factors. For example, banking market integration is indicated by a nar-
rowing dispersion of interest rates on consumer credit, mortgages and deposits with of common maturity.
The computed price-based measures are broadly used in policy researches, such as the annual reports on “Financial Integration in
Europe” issued by the European Central Bank (ECB) since 2005 and the “ASEAN Integration Report 2015” by the ASEAN Secretariat.
Empirically, the convergence tendencies are also tested by model-based methods, such as cointegration analysis (Centeno and Mello,
1999; Schuler and Heinemann, 2002) or other time-series techniques (Fratzscher, 2002). The concepts of “β-convergence” and “σ-
convergence” (Sala-i-Martin, 1996) and the Phillips and Sul (2007) panel convergence tests have also been applied to study financial
integration, especially banking market integration in European countries (Affinito and Farabullini, 2006; Rughoo and Saranties,
2012, 2014). Similar indicators have also been applied to Asian financial markets.
The extant literature provides mixed results, some studies find evidence for short-term or partial financial integration in the
ASEAN markets, although there is little evidence for sustainable long-term convergence (Rizavi et al., 2011; Tang, 2011; De Truchis
and Keddad, 2013; Guesmi et al., 2014). Other studies argue that intra-regional financial integration is outweighed by external
integration with other major economies (e.g. Borensztein and Loungani, 2011), and apparent intra-regional integration is driven by
external forces. Nevertheless, based on the traditional measures, the degree of integration in ASEAN financial markets, have im-
proved since the 1997 Asian crisis, and this is consistent with the findings of this paper using the price-based indicators.
While the convergence of ‘price-based” measures are prevalent indicators of financial integration, for countries in transition to full
market integration, financial stability is also of concern. Banks, from countries that operate in a more competitive environment,
would be more productive and profitable, while the less competitive and less efficient banks would lose market shares and face take-
over risk.
Studies of the convergence properties at the institutional and operational level are relatively limited, especially banking com-
petitiveness. Weill (2013) estimates Lerner indices and PR H-statistics for the EU banking market during the early 2000s and find that
there is no apparent increase in market competitiveness. Andrieş and Căpraru (2014) investigate the level of banking competitiveness
in EU27 from 2004 to 2010, also using the PR H-statistics, and find evidence for the Competition-Efficiency Hypothesis. Both studies
find some evidence of β-convergence and σ-convergence in the state of banking competitiveness of the EU economies. For Asian
countries, Matthews and Zhang (2010) test for convergence in bank efficiency and productivity in China. Zhang and Matthews (2012)
apply similar tests to investigate the convergence properties in bank efficiency in Indonesia. Cross-country studies on convergence
properties in bank competitiveness has not been seen for the ASEAN.
The majority of the studies on bank competitiveness in ASEAN countries investigate the relationship between bank com-
petition and many other factors but financial integration. For example, banking competitiveness and monetary policies
transmission (Olivero et al., 2011; Khan et al., 2016); the impacts of competitiveness on the bank risk taking actions (Liu et al.,
2012); and the relationship between bank competitiveness and financial stability (Fu et al., 2014). Nevertheless, like what is
found in this paper, most of the studies found that banking markets in ASEAN countries operate under conditions of mono-
polistic competition. The literature also largely support the positive impacts of foreign bank entry on competition in ASEAN
countries (e.g. Olivero et al., 2011; Mulyaningsih et al., 2015; Daley and Matthews, 2012; Boateng et al., 2015). The present
study contributes to this stream of the literature by providing empirical evidence on the convergence properties of ASEAN
banking competitiveness, which are then used as an institutional level indicator for the degree of financial integration of the
region.

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3. Methodology

3.1. Measures of banking market competitiveness

It is common place in the banking competitiveness literature to apply the Panzar-Rosse (PR) reduced-form revenue model (Rosse
and Panzar, 1977; Panzar and Rosse, 1982, 1987).
The PR model examines the extent to which changes in input factor prices are reflected in (equilibrium) revenues of a specific
firm. The key argument is that, an increase in input factor prices will increase the marginal cost for all kind of firms, but the reactions
to this change is different in different type of markets. In a perfect competitive market or contestable market, the marginal revenues
will increase by the same amount as marginal costs so that the zero economic profit is still maintained. Therefore the total revenue
should increase proportionally with the increase in factor prices in a competitive market. On the other hand, monopoly or perfect
collusions with full market power, that operate on the elastic part of the demand curve, would bear all the reduction in equilibrium
output demand due to increases in price, and the total revenue is reduced in this case.
The PR model is empirically tested by estimating a log linear reduced form revenue function in terms of input factor prices and
other exogenous variables. The H-statistic is the sum of the factor-price elasticities with respect to revenue and measures the extent to
which total revenue responds to a change in input factor prices. In the case of a monopolist or perfect cartel the H-statistic must be
non-positive, indicating that an increase in input factor prices will reduce bank’s total revenue. In a symmetric Chamberlin mono-
polistic competitive equilibrium, the H-statistic is less than or equal to unity, indicating that the reduction in revenue is less than
proportion with the increases in input prices. The H-statistic equals to unity when the banking market is in long-run competitive
equilibrium, implying that bank’s total revenue will increase by exactly the same proportion as costs. The PR H-statistic is not only
used to reject certain market types, Vesala (1995) shows that, under certain conditions, the magnitude of H-statistic can be inter-
preted as a measure of the degree of competition.
The dependent variable used in the present study is total bank revenue (TR),4 including both interest revenue (IR) from traditional
bank business, and other operating income (OYY) accounting for the increasingly important non-traditional banking activities, such
as fee-based products and other off-balance sheet activities. Following the intermediation approach of Sealey and Lindley (1977), the
input variables are the number of employees, fixed assets and total deposits, and their prices are PL, PFA and PD respectively. The
bank-specific control variables include the size of the bank (SIZE) measured by the natural logarithm of their total assets, the ratio of
loans to deposit (RL/D) measuring the leverage and the ratio of loans to assets (RL/A) measuring the loan intensity. These two ratios
could be considered as a measure of the bank’s risk preference. The growth rate of GDP (ΔGDPit) is included to capture the effect of
macroeconomic variations. The equation estimated for each country is as following:

lnTRit = 0 + 1 lnPFAit + 2 lnPLit + 3 lnPDit + 1 SIZEit + 2 lnRL /Dit + 3 lnRL / Ait + ln GDPit + µit (1)

and the H-statistic is defined as

H= 1 + 2 + 3 (2)

The validity of the PR model and the H-statistic depends heavily on the assumption of market equilibrium. The predictive power of
the H-statistic is only valid, especially for monopolistic and perfect competition type of market, when the market is in its long-run
equilibrium. This assumption is tested by estimating the equivalent reduced-form profit equation corresponding to Eq. (1). The idea is
that the bank’s profit should be equalised under the competitive pressure and no bank can make supernormal returns in equilibrium,
therefore in long-run equilibrium profit should not be affected by changes in input prices.

lnROA *it = 0 + 1 lnPFAit + 2 lnPLit + 3 lnPDit + 1 SIZEit + 2 lnRL/ Dit + 3 lnRL / Ait + ln GDPit + µ it (3)

and the E-statistic is the sum of the coefficients on logarithms of input prices:

E= 1 + 2 + 3 (4)

When E = 0, the market is in long-run equilibrium; while E < 0 implies market disequilibrium where an increase in factor price
would lead to decrease in profit. In the case of banking markets that are in disequilibrium, the dynamic version of the PR model
proposed by Goddard and Wilson (2009) is a modelling convenience. An unbiased estimate of the H-statistic is obtained from the
dynamic panel estimator from the Arellano and Bond (1991) (GMM) procedure, by including a lagged dependent variable5. Also the
speed of adjustment towards equilibrium can be directly assessed through the coefficient estimates on the lagged depend variable.
The model with dynamic adjustment is:

4
Most studies, e.g. Such as Shaffer (1982), Claessens and Leaven (2004) among others, have chosen to scale the dependent variable by bank’s total
assets, or include a scale variable on the right-hand side of the equation to capture the economies of scale. However, as argued by Bikker et al.
(2011) this would essentially transform the revenue equation into a ‘price’ equation, and may distort the nature of the revenue equation, resulting in
a systematic bias of the H-statistic towards unity under monopoly or monopolistic competition models. For this reason, in the present study, the
absolute (total) revenue measure are used and there is no size/scale variable included on the right-hand side of the equation.
5
In Goddard and Wilson (2009), they also suggest that the dynamic adjustment should be made to profit equation too when testing market
equilibrium. However, this was not done in the present study since the validity of E-statistic does not depend on the market long-run equilibrium
assumption.

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T. Zhang, K. Matthews Research in International Business and Finance 47 (2019) 487–500

lnTRit = 0 + 1 lnPFAit + 2 lnPLit + 3 lnPDit + 1 sizeit + 2 lnRL/ Dit + 3 lnRL/ Ait + ln GDPit
+ lnTRit 1 + µit (5)

where parameter is the so-called “persistence coefficient”, which measures the adjustment speed towards market equilibrium and
plays a crucial role in estimating an unbiased H-statistic. The cross-bank fixed effects are eliminated by using first-order differences of
all variables. The GMM estimator for unbiased H-statistic under market disequilibrium is defined as:

H =( 1 + 2 + 3)/(1 ) (6)

This approach is used with caution in the present study, and only when strong evidence of market disequilibrium is found.

3.2. Tests for convergence

The growth literature shows that, β-convergence exists when the economy of low-income countries grows faster than that of high-
income countries. In other words, the low-income countries are catching up with high-income countries. An alternative concept is σ-
convergence, which relates to the dispersion of interested measures across groups of economies and is achieved when the dispersion
narrows over time. The two concepts of convergence are related but they are conceptually different: σ-convergence studies how the
distribution of income evolves over time whereas β-convergence studies the mobility of income within the same distribution. With
respect to the banking competitiveness analysis, a β-convergence means that the less competitive markets are catching up with more
competitive markets, and this is tested by the following equation:
lnHi, t lnHi, t 1 = + lnHi, t 1 + i, t (7)

where Hi,t 6 is the H-statistic for country i during time period t. Hi,t-1 denotes the H-statistic for country i in the previous period t-1.
and β is the parameters to be estimated. The greater the absolute value of β, the greater the tendency for competition convergence.
However, the results of this general test does not indicate whether the ‘catching-up’ effect is driven by the improvement from less
competitive banking markets or from the deterioration from the more competitive banking markets.7 Therefore, Eq. (7) is modified to
test for the disaggregated β-convergence of banking market competitiveness, as follows:8
lnHi, t lnHi, t 1 = + 1 lnHhighi, t 1 + 2 lnHlowi, t 1 + i, t (8)

lnHi, t 1, if lnHi, t 1 > H¯ t

lnHhighi, t 1 =
0, if lnHi, t 1 < H¯ t

and

lnHi, t 1, if lnHi, t 1 < H¯ t

lnHlowi, t 1 =
0, if lnHi, t 1 > H¯ t
¯
where Ht represents the average competition level of ASEAN-5 banks at time period t; 1 and 2 are the convergence parameters for
countries with higher competition levels above the regional average and countries with a lower competition levels correspondingly,
and a negative and significant estimate implies a force of convergence from the sub-group.
The σ-convergence exists when there is reduction of the dispersion of bank competition level among ASEAN-5 economies. The σ-
convergence is tested as follows:
Wi, t = + Wi, t 1 + i, t (9)
¯
where Wi, t = Wi, t Wi, t 1; Wi, t = lnHi, t lnHt , and and σ are coefficients to be estimated. i, t is the error term. If the coefficient σ is
negative and statistically significant, there is σ-convergence, implying a narrowing dispersion over time in ASEAN-5’s banking
competitiveness.
Both convergence tests require H-statistics that shows the dynamic changes in banking competitiveness over time, however, the PR
model using panel data only provides information on the overall competitiveness for the sample period. Also the PR model depends
heavily on the assumption of long-run market equilibrium and is therefore not directly applicable to measure market competitiveness
in a single year9. In order to investigate the evolution of banking market competitiveness over time, we apply the GMM dynamic
estimator to estimate PR H-statistics for 5-year rolling-windows of the sample, using Eqs. (5) and (6).10 We obtain 19 H-statistics over
23 years for each country.

6
The H-statistics is adjusted, as H* = 2 + H, to deal with negative values.
7
This is also the reason why β- and σ-convergence test is preferred to the Phillips and Sul (2007) panel convergence test, which tests convergence
relative to the panel cross-section average over time without providing information on the direction of the convergence.
8
Similar modification is used by Andrieş and Căpraru (2014).
9
Although this practice has been seen in a few studies, e.g. Weill (2013) and Andrieş and Căpraru (2014), it is theoretically invalid.
10
Similar method was used in Daley and Matthews (2012).

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T. Zhang, K. Matthews Research in International Business and Finance 47 (2019) 487–500

4. Data

In this study, we choose commercial banks of the ASEAN-5 during the period of 1994–2016, which covers the 1997/98 Asian
financial crisis and the global financial crisis of 2008–2009. These are the 5 largest economies in the sub-region and their economic
importance makes them a reasonable representative for the whole region.
The data is drawn primarily from the balance sheet and income statement of individual bank from the ORBIS Bank Focus,11 which
reports published financial statements from financial institutions worldwide. For missing data, other resources including annual
reports of individual bank, central bank reports and internet web resources are used. Only commercial banks are considered in this.
The unconsolidated financial reports are used, where available, to avoid double-counting. Consolidated reports are used only when
unconsolidated reports are not available. After adjusting the data for missing values, reported errors and outliers, we end up with an
unbalanced panel data set of 2809 bank-year observations, in which each bank exists for at least 5 consecutive years.12 Macro-
economic data are collected from the International Monetary Fund (IMF) website.
The price of labour is calculated as the ratio of personnel expenses to the total assets.13 The price of deposits is calculated as the ratio
of interest expenses to total deposits. The price of fixed assets is measured by the ratio of other operating expenditures to fixed assets,
here the operating expense can be interpreted as capital maintenance. The output is the total revenue, including both interest revenue
and non-interest revenue. For the long-run market equilibrium test, the dependent variable is the rate of return on assets (ROA). All the
monetary variables are adjusted by the Purchasing Power Parity exchange rate and converted into inflation-adjusted US dollars. Table 1
presents a brief comparison on the mean values of key variables across ASEAN-5 over the whole sample periods and sub-periods.
Observations during the two financial crisis periods 1997–1998 and 2008–2009, are excluded from the descriptive statistics to avoid
distortions. After adjusting for the price level and the exchange rate, many of the key variables show significant differences in value
among these 5 countries, but with similar evolving patterns. Total revenues, labour cost and maintenance cost of fixed assets increase
overtime for all countries, and the unit cost of deposit has shown a slight decreasing trend in most of the countries.

5. Empirical findings

5.1. Price based indicators

We begin this section with information on bank interest rates for the ASEAN-5. A visual examination provides primary evidence of
some degree of convergence in the pricing behaviour of banks in the region. Fig. 1 provides a plot on the deposits rate and lending
rate. A gradual declining trend can be seen over the past two decades, especially after the 1997/98 Asian financial crisis. The trend
towards the one-price behaviour after the1997 Asian financial crisis is further evidenced by the narrowing dispersion shown in Fig. 2.
The standard deviation of deposits rate and lending rate has decreased from their peak (13.75 for deposit rate, 9.36 for lending rate)
in 1998 to less than 3 in recent years.
The results of Johansen multivariate Co-integration test14 finds at least three co-integrating relationships among the interest rates
on deposit and two co-integrating relationships among the lending interest rates of ASEAN-5, implying that the interest rates in the
ASEAN-5 share similar stochastic trends. The test results are reported in Table 2. This preliminary finding on co-movement of
interests rates provides evidence of the trend toward “one-price” behaviour of ASEAN banks, providing a signal of a modest degree of
integration of the banking markets in ASEAN.
Nevertheless, as argued above, the price-based convergence indicator does not necessarily imply convergence in banks’ profitability
and productive efficiency, which is more important for countries under the transitional process toward full market integration. Institutional
and operational convergence in terms of competitiveness add valuable information on how well the banks are prepared for competition in
the ongoing integrating process, and assist policy consideration regarding financial stability during the transitional period.

5.2. The measure of competitiveness

An important assumption of the PR model is that the market is under long-run equilibrium. A Chow structural break test at 1998
and 2009 is carried out for each country to test for the stability of the parameters, and the results confirm that all countries have
experienced at least one, and in most cases two, significant structural changes following the financial crises. Therefore, the para-
meters in the estimating equation are not stable, neither are the estimates for the E-statistics, and the assumption of long-run market
equilibrium for the whole period does not hold.15

11
Formerly known as BankScope database of Bureau van Dijk.
12
Only a limited number of bank reports with limited time periods are available for Singapore. According to the Monetary Authority of
Singapore, although there are 120 commercial banks operating in Singapore by March of 2011, only 6 are local banks and only one-fifth (26 out of
114) of foreign banks offer full banking services. Financial reports of foreign subsidiaries or representative offices are not publicly available.
However, given the openness of the Singaporean banking industry the few banks in our sample must represent the general operational level of
efficiency and competitiveness
13
As the number of employee is not available in most cases, we follow standard practice in the literature, such as in Weill (2013) among others.
14
Augmented Dickey-Fuller tests for unit root show that the interest rates of ASEAN-5 from 1994- 2016 are all I(1) processes, Test results are
reported in Appendix A.
15
Results are available upon request.

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Table 1
Descriptive statistics of key variables.

country No. Obs. TR ROA PL PFA PD L/A L/D ΔGDP

1994– Indonesia 1,117 1235.48 0.57 2.05 2.57 0.10 0.57 0.84 6.59
2016 Malaysia 639 1600.36 1.10 2.40 2.57 0.15 0.52 0.70 7.20
Philippines 510 628.48 1.14 1.04 1.68 0.04 0.46 0.60 6.80
Singapore 139 2456.35 1.15 3.86 5.28 0.02 0.49 0.66 7.45
Thailand 404 2649.67 −0.16 1.10 1.42 0.04 0.70 0.88 5.61
St. Dev. 843.63 0.57 1.15 1.53 0.05 0.09 0.15 0.71

1994– Indonesia 107 362.10 1.63 1.82 2.67 0.21 0.71 0.83 10.04
1996 Malaysia 80 439.93 1.26 1.11 0.94 0.04 0.60 0.76 11.95
Philippines 50 313.33 2.01 0.55 1.04 0.05 0.54 0.70 7.14
Singapore 7 1443.20 1.46 0.39 0.55 0.03 0.56 0.67 10.00
Thailand 43 3040.92 1.53 0.36 0.48 0.08 0.84 1.05 9.38
St. Dev. 1170.69 0.28 0.62 0.89 0.07 0.13 0.49 1.73

1999– Indonesia 426 1061.18 1.26 1.92 2.66 0.08 0.47 0.70 7.11
2007 Malaysia 247 1779.32 1.24 1.90 2.13 0.23 0.51 0.66 8.12
Philippines 223 519.66 0.74 0.86 1.50 0.05 0.43 0.57 7.19
Singapore 64 1757.83 1.70 4.12 5.68 0.03 0.46 0.68 8.93
Thailand 160 1854.31 −0.24 0.70 1.44 0.03 0.64 0.83 7.70
St. Dev. 584.80 0.74 1.37 1.75 0.08 0.08 0.10 0.75

2010– Indonesia 389 1787.22 1.30 2.33 2.24 0.03 0.65 0.91 7.22
2016 Malaysia 187 2040.73 1.04 3.94 4.22 0.13 0.47 0.73 7.23
Philippines 143 964.32 1.46 1.51 2.20 0.02 0.44 0.56 7.97
Singapore 39 4139.40 0.93 5.14 6.55 0.01 0.49 0.63 7.77
Thailand 130 3413.83 0.81 1.97 1.71 0.02 0.70 0.89 5.30
St. Dev. 1284.06 0.27 1.52 2.02 0.05 0.12 0.15 1.06

Notes. No. of Obs = number of observations; TR = Total Revenue; ROA = Return on Assets (unadjusted); PL = Price of Labour; PFA = Price of
Fixed Assets; PD = Price of Deposit; L/A = loan to asset ratio; L/D = loan to deposit ratio. ΔGDP = GDP growth rate. All Monetary variables are
measured in million US dollar.

Fig. 1. Interest rates across ASEAN-5 for.1994–2016.

Data source: IMF International Financial Statistics (IFS).

Fig. 2. The dispersion in interest rates across ASEAN-5.

Data source: IMF International Financial Statistics (IFS). Notes: DR = deposit interest rate, LR = Lending interest rate

Therefore, following Goddard and Wilson (2009), GMM dynamic estimation is applied in estimating the PR model for the whole
sample period. Given the significant structural changes following the two financial crises, dynamic H-statistics for sub-periods,
1994–1998, 1999–2009 and 2010–2016 are also estimated by using Eqs. (5) and (6). Results are presented in Table 3.
The banks specific variables generally show consistent marginal effects on revenue, where banks operating with lower leverage
((RL/D) and higher loan intensity (RL/A) can earn higher revenue in most cases. The lower the value for RL/D the more prudential the

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Table 2
Johansen Test for Co-integration of interest rates among ASEAN-5 (1994–2016).a

Cointegration test based on Johansen's maximum likelihood method: Deposit rates (DR)

λmax rank tests λmax rank value 95% critical values

H0: r = 0 Ha: r > 0 51.74** 30.04
H0: r ≤ 1 Ha: r > 1 27.28** 23.80
H0: r ≤ 2 Ha: r > 2 23.21** 17.89
H0: r ≤ 3 Ha: r > 3 9.09 11.44
H0: r ≤ 4 Ha: r > 4 2.23 3.84

λtrace rank tests λtrace rank value

H0: r = 0 Ha: r=1 113.55** 59.46
H0: r = 1 Ha: r=2 61.8** 39.89
H0: r = 2 Ha: r=3 34.53** 24.31
H0: r = 3 Ha: r=4 11.32 12.53
H0: r = 4 Ha: r=5 2.23 3.84

Normalised ecm: DR1 DR2 DR3 DR4 DR5

1 −8.88E-16 −1.78E-15 54.51 −13.82
1.04E-17 1 −2.22E-16 16.83 −4.45
−9.71E-17 −1.11E-15 1 13.05 −3.86

Cointegration test based on Johansen's maximum likelihood method: Loan rates (LR)

λmax rank tests λmax rank value 95% critical values

H0: r = 0 Ha: r > 0 45.96** 30.04
H0: r ≤ 1 Ha: r > 1 29.05** 23.80
H0: r ≤ 2 Ha: r > 2 14.59 17.89
H0: r ≤ 3 Ha: r > 3 7.17 11.44
H0: r ≤ 4 Ha: r > 4 0.15 3.84

λtrace rank tests λtrace rank value

H0: r = 0 Ha: r=1 96.92** 59.46
H0: r = 1 Ha: r=2 50.96** 39.89
H0: r = 2 Ha: r=3 21.91 24.31
H0: r = 3 Ha: r=4 7.32 12.53
H0: r = 4 Ha: r=5 0.15 3.84

Normalised ecm: LR1 LR2 LR3 LR4 LR5

1 2.22E-16 −0.93 −2.16 0.82
0 1 −0.43 −0.21 −0.14

** Denotes significance at 5%.

a
The optimal lag length in VAR estimation is selected based on the minimization of the AIC and the SBC criteria. The selection of the appropriate
model regarding the deterministic components in the multivariate system is based on the ‘Pantula Principle’, suggested by Johansen (1992). Test

bank is, and higher revenue is rewarded to more prudential banks. The positive sign on RL/A implies that the higher the proportion of
loans in total assets, the higher the revenue a bank generates. Larger banks have some advantage in revenue generation than smaller
banks. The rate of economic growth is only significant in the 1999–2009 sub-period.
After adjusting for the dynamics of transition, the estimated H-statistics are generally lower than what has been typically found in
the literature using static fixed effect panel estimations,16 but still in the range of monopolistic competition for most of the cases. The
Wald test of H = 0 and H = 1 are also conducted, and rejections of the null hypothesis verifies the lack of a monopoly or perfect
competition. Using the values of H-statistics as a measurement of the level of competition, the countries can be ranked from the least
competitive to the most competitive banking market as: Thailand, the Philippines, Indonesia, Singapore and Malaysia. The dis-
crepancies in banking market competition levels of the ASEAN-5 are still quite significant. The sub-period results show that an
improvement in market competitiveness is only seen in Malaysia and Thailand.
The dynamic H-statistics provide information on the overall competitiveness for the sample periods under market disequilibrium,
but does not show the changing patterns over time. Therefore, a 5-year rolling-window of PR H-statistics for each country is also
estimated by using Eqs. (5) and (6) and presented in Table 4.
The 5-year rolling window estimation result of H-statistics confirms the substantial differences in competitiveness across the
ASEAN-5. Malaysia has the most competitive and relatively stable banking market, while market competitive conditions fluctuate the
most in Thailand. The result do not indicate a clear overall trend improvement in the two decades, but rather common fluctuations in
response to global shocks. The bank competition level dropped sharply for all countries straight after the two financial crises
(1998–2003 and 2008–2012), and a relatively steady competition level is seen during the period between the two financial crises

16
For example in Claessens and Laeven (2004), the estimates of H-statistic for Indonesia, Malaysia and the Philippines are 0.62, 0.68, and 0.66
accordingly for the years 1994-2001.

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 Table 3
GMM Dynamic Estimation of PR H-statistics (1994–2016).

1994–2016 1994–1998

TR I M P S T I M P S Ta
T. Zhang, K. Matthews

Constant 9.15 0.73 −0.13 −2.66 −0.86 7.14 0.21 −4.87 – –

(0.56)*** (0.86) (1.30) (1.25)** (1.04) (2.49)*** (2.00) (3.46) – –
PFA 0.05 0.04 0.08 0.03 −0.06 0.05 0.07 −0.08 – –
(0.01)*** (0.01)*** (0.03)** (0.02) (0.02)** (0.05) (0.13) (0.09) – –
PL −0.02 −0.01 −0.03 −0.01 0.04 0.06 −0.01 0.09 – –
(0.01) (0.02) (0.03) (0.02) (0.03) (0.05) (0.13) (0.09) – –
PD 0.38 0.46 0.25 0.32 0.32 0.43 0.17 0.42 – –
(0.01)*** (0.02)*** (0.02)*** (0.02) (0.02)*** (0.09)*** (0.15) (0.11)*** – –
RL/D −0.33 −0.40 −0.09 −0.19 0.05 −0.29 −0.32 −0.56 – –
(0.02)*** (0.03)*** (0.05)* (0.10) (0.07) (0.12)** (0.26) (0.42) – –
RL/A 0.47 0.54 0.06 0.38 0.54 0.37 0.51 0.53 – –
(0.03)*** (0.03)*** (0.06) (0.09) (0.07)*** (0.13)*** (0.41) (0.46) – –
SIZE 0.81 0.65 0.67 0.66 0.85 0.83 0.47 0.76 – –
(0.02)*** (0.03)*** (0.03)*** (0.05) (0.03)*** (0.11)*** (0.22)** (0.16)*** – –
ΔGDPt −1.87 0.01 −0.05 0.55 0.00 −1.52 −0.03 1.04 – –
(0.12)*** (0.18) (0.28) (0.25) (0.22) (0.49)*** (0.49) (0.82) – –
TRt-1 0.02 0.23 0.24 0.26 0.12 0.05 0.46 0.20 – –
(0.02) (0.02)*** (0.03)*** (0.04) (0.02)*** (0.11) (0.19)** (0.11)* – –

H statistic 0.42 0.64 0.38 0.47 0.34 0.57 0.42 0.54 – –

494
Wald test H = 0 chi2(1) = 553.64 chi2(1) = 336.79 chi2(1) = 94.70 chi2(1) = 112.88 chi2(1) = 81.21 chi2(1) = 30.71 chi2(1) = 2.26 chi2(1) = 8.78 – –
*** *** *** *** *** *** * ***
– –
Wald test H = 1 chi2(1) = 633.78 chi2(1) = 91.23 chi2(1) = 143.20 chi2(1) = 67.51 chi2(1) = 312.46 chi2(1) = 9.07 chi2(1) = 3.52 chi2(1) = 8.63 – –
*** *** *** *** *** *** * ***
– –
Market Condition MC MC MC MC MC MC MC MC – –

1999–2009 2010–2016

TR I M P S T I M P S T

Constant 9.31 2.57 6.71 −0.34 3.56 4.00 1.07 −2.57 −4.00 1.08
(0.83)*** (0.90)*** (1.56)*** (1.28) (1.64)** (2.57) (1.60) (2.11) (2.52) (1.33)
PFA 0.06 0.03 0.10 0.14 0.05 0.02 0.11 0.11 0.04 −0.06
(0.01)*** (0.01)*** (0.04)** (0.03)*** (0.04) (0.03) (0.03)*** (0.05)** (0.06) (0.03)*
PL 0.00 0.03 0.02 −0.07 0.01 0.00 −0.07 −0.04 −0.11 0.03
(0.02) (0.03) (0.04) (0.03)** (0.05) (0.03) (0.04)* (0.04) (0.07)* (0.04)
PD 0.41 0.40 0.35 0.40 0.24 0.29 0.63 0.17 0.04 0.33
(0.02)*** (0.03)*** (0.03)*** (0.02)*** (0.03)*** (0.02)*** (0.03)*** (0.03)*** (0.06) (0.04)***
RL/D −0.30 0.23 −0.17 −0.19 0.38 −0.31 −0.72 −0.22 −0.25 −0.55
(0.05)*** (0.11)** (0.07)** (0.09)** (0.10)*** (0.02)*** (0.05)*** (0.14) (0.27) (0.11)***
RL/A 0.42 −0.16 0.10 0.42 0.08 0.25 0.90 0.14 0.26 1.51
(0.05)*** (0.12) (0.07) (0.09)*** (0.11) (0.04)*** (0.05)*** (0.16) (0.33) (0.12)***
SIZE 0.84 0.77 0.81 0.69 0.96 0.70 0.56 0.33 0.66 0.72
(0.02)*** (0.04)*** (0.04)*** (0.05)*** (0.05)*** (0.02)*** (0.05)*** (0.05)*** (0.08)*** (0.05)***
ΔGDPt −1.94 −0.41 −1.50 0.24 −1.17 −0.85 0.61 0.77 0.63 −0.09
(0.19)*** (0.19)** (0.33)*** (0.25) (0.35)*** (0.55) (0.36)* (0.47)* (0.44) (0.28)
Research in International Business and Finance 47 (2019) 487–500

(continued on next page)

 Table 3 (continued)

1999–2009 2010–2016

TR I M P S T I M P S T
T. Zhang, K. Matthews

TRt-1 0.00 0.01 0.07 0.10 0.06 0.18 0.01 0.45 0.20 0.14
(0.03) (0.04) (0.05) (0.04)** (0.03) (0.03)*** (0.04) (0.06)*** (0.11)* (0.04)***

H statistic 0.47 0.47 0.50 0.52 0.31 0.37 0.67 0.43 −0.04 0.36
Wald test H = 0 chi2(1) = 206.11 chi2(1) = 134.37 chi2(1) = 114.88 chi2(1) = 154.07 chi2(1) = 25.02 chi2(1) = 232.24 chi2(1) = 217.29 chi2(1) = 13.41 chi2(1) = 0.16 chi2(1) = 39.31
*** *** *** *** *** *** *** *** ***

Wald test H = 1 chi2(1) = 223.34 chi2(1) = 122.96 chi2(1) = 59.97 chi2(1) = 75.26 chi2(1) = 130.89 chi2(1) = 243.29 chi2(1) = 49.88 chi2(1) = 11.30 chi2(1) = 31.55 chi2(1) = 106.32
*** *** *** *** *** *** *** *** *** ***

Market Condition MC MC MC MC MC MC MC MC M MC

Notes. ***, **, * denote significance at 1%, 5% and 10% level accordingly. Estimated standard errors are reported in (). M – Monopoly or perfect collusive; MC – Monopolistic Competition; PC – Perfect
Competition.
I, M, P, S and T stands for Indonesia, Malaysia, the Philippines, Singapore and Thailand respectively.
a
Singapore and Thailand do not have enough observations to carry out the dynamic estimation in this period.

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Research in International Business and Finance 47 (2019) 487–500
T. Zhang, K. Matthews Research in International Business and Finance 47 (2019) 487–500

Table 4
Summary of 5-year rolling window estimates of H-statistics.

Indonesia Malaysia Philippines Singapore Thailand Regional average

1994–1998 0.57 0.42 0.54 – – 0.51

1995–1999 0.55 0.55 0.66 0.72 1.10 0.72
1996–2000 0.56 0.55 0.56 0.76 0.92 0.67
1997–2001 0.52 0.65 0.56 0.85 0.62 0.64
1998–2002 0.50 0.47 0.43 0.62 0.27 0.46
1999–2003 0.48 0.61 0.47 0.56 −0.12 0.40
2000–2004 0.49 0.48 0.49 0.55 −0.21 0.36
2001–2005 0.54 0.41 0.45 0.47 0.07 0.39
2002–2006 0.74 0.37 0.39 0.46 0.48 0.49
2003–2007 0.56 0.52 0.37 0.37 0.50 0.46
2004–2008 0.53 0.48 0.37 0.35 0.51 0.45
2005–2009 0.52 0.37 0.31 0.43 0.49 0.42
2006–2010 0.42 0.63 0.20 0.42 0.46 0.43
2007–2011 0.36 0.60 0.27 0.22 0.27 0.35
2008–2012 0.31 0.59 0.17 0.20 0.25 0.30
2009–2013 0.35 0.63 0.09 0.09 0.22 0.27
2010–2014 0.39 0.63 0.33 −0.03 0.27 0.32
2011–2015 0.39 0.52 0.28 0.23 0.28 0.34
2012–2016 0.36 0.51 0.28 0.06 0.66 0.37

Country Average 0.48 0.53 0.38 0.41 0.39 0.44

from 2000 to 2006. The ASEAN banking markets are heavily influenced by the global environment, and are easily distorted by the
global economic downturn, especially for countries with higher degree of openness, like Singapore and Thailand. The dramatic
decline in Singaporean bank competition level in recent years may also attribute to the enhancement of the regulatory role of
Monetary Authority of Singapore (MAS) in the banking market after 2006.17

5.3. Convergence of competitiveness

Eqs. (7)–(9) are estimated using the 5-year rolling window of the H-statistics reported in Table 4. The rolling-window estimation of H-statistics
using overlapped samples may introduce correlations in the H-statistics, and consequently make the residuals of a given country correlated across
time in the convergence test, but are independent across countries. Therefore, following Petersen (2009), we employ the Cluster-robust standard
errors, which are designed to correct the correlation problem of the residuals within a cluster. The results are shown in Table 5. The results show
strong evidence for unconditional β-convergence and σ-convergence with negative and significant coefficients, indicating both types of convergences
in the competitiveness of the ASEAN-5 banking market. Additionally, it can be seen that the convergence speed is negatively affected by the two
financial crises. Both β-convergence and σ-convergence are tested for the whole sample period and three sub-periods, divided by the common
turning points in the dynamic paths of H-statistics, namely period 1–4 which coincides with year 1994–2001, period 5–11 which coincides with
year 1998–2008 and period 12–19 which coincides with year 2005–2016. A Wald test is also conducted to test whether the convergence
coefficient is statistically different from the previous period. Although all sub-periods are still characterized by a converging trend in the banking
market, the speed of convergence has slowed down as evidenced by a significantly reduced absolute value of the coefficient on the lagged
dependent variable in period 5–11, i.e. after the 1997/98 Asian crisis, and a less significant drop in the period after the 2008/09 global crisis.
In terms of the disaggregated β-convergence, the convergence coefficients for both groups of countries are negative and significant
in most cases. This indicates that convergence is occurring from both directions. The financial integration process has not just
improved the overall competitiveness of the ASEAN-5 banking markets, but also the more competitive banking markets have become
less. The σ-convergence results further confirms that the banking competition levels of these 5 countries are moving towards a sample
average rather than the best-practice. The sub-period estimation also shows that the convergence speed from both groups slowed and
the less competitive banking markets show insignificant convergence tendency in recent years (2005–2016).

6. Conclusions

This paper assesses the degree of integration in the ASEAN-5’s financial markets, focussing on the retail banking markets. It is expected
that greater market integration will foster competition, promote efficiency and increase welfare through reduced prices of financial services
and credit, and convergence to a common level. One of the interesting findings in this paper is that, the financial integration has coincided
with convergence of banking market based on both price-based indicators and institutional level indicators of market competitiveness, but its
impact on improving banking market competiveness level is less clear. In common with findings for the EU banking market, the ASEAN-5
banking markets are converging toward monopolistic competition (Weill, 2013; Andrieş and Căpraru, 2014).

17
Studies for periods before the 2007-08 global financial crisis typically find that Singapore has the most competitive banking market, e.g. Jeon
et al. (2011), Olivero et al. (2011), which is consistent with our results for the same period.

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T. Zhang, K. Matthews Research in International Business and Finance 47 (2019) 487–500

Table 5
Test of β-convergence of H-Statistics.

1994–2016 Period 1–4 Period 5–11 Period 12–19

(1994–2001) (1998–2008) (2005–2016)

Unconditional β-convergence
Constant 0.08 0.23 0.10 0.06
(0.02)** (0.05)*** (0.02)*** (0.02)*
lnHi, t 1 −0.25 −0.48 −0.33 −0.23
(0.06)** (0.11)** (0.02)*** (0.08)*
Wald test F(1,4) = 36.68*** F(1,4) = 1.45
R-squared 0.13 0.51 0.20 0.09

Disaggregated β-convergence
Constant 0.08 0.33 0.10 0.08
(0.02)** (0.07)*** (0.02)*** (0.03)*
lnHhighi, t 1 −0.24 −0.62 −0.30 −0.26
(0.06)** (0.10)*** (0.07)** (0.10)*
Wald test F(1, 4) = 21.36*** F(1,4) = 0.15
lnHlowi,t 1 −0.30 −0.74 −0.42 −0.35
(0.09)** (0.15)*** (0.03)*** (0.22)
Wald test F(1,4) = 91.29*** F(1, 4) = 0.09
R-squared 0.14 0.60 0.23 0.10

σ-convergence
Constant −0.005 −0.02 −0.002 −0.002
(0.01) (0.02) (0.01) (0.01)*
Wi, t 1 −0.25 −0.44 −0.26 −0.21
(0.03)*** (0.09)*** (0.03)*** (0.08)*
Wald test F(1,4) = 45.47*** F(1,4) = 0.35
R-squared 0.12 0.32 0.13 0.07

No. of obs. 88 13 35 40

Notes: ***, **, * denote significance at 1%, 5% and 10% level accordingly. Estimated standard errors are reported in (). The Wald test reports the test
results of whether the coefficient, i.e. the convergence speed, is significantly different from the previous sample period.

Banking markets in the ASEAN-5 countries operate under monopolistic competition in most cases, and the banking markets show
some level of symmetric response to common shocks. Some evidence of both β- and σ-convergence has been found, but the con-
vergence process is easily distorted by the external economic environment. The cross-country comparison shows that the actual
degree of competitiveness still varies significantly from country to country, and the ongoing process of ASEAN financial integration
has not improved banking market competitiveness in general. The ASEAN banking markets are still quite sensitive to and heavily
influenced by the global environment. One further point to notice is that the current study only focusses on the five founder countries
among which the ASEAN Financial Integration Framework (AFIF) aim to achieve the semi-integrated banking market by 2020.
Inclusion of other countries from this region with less developed banking markets would require extra caution to ensure stability.
The balance between bank stability and bank competition is an ongoing debate in academic and policy circles and the con-
vergence to monopolistic competition across the ASEAN-5 banking markets strikes a resonance with findings for the developed
economies. Our findings show that the speed of convergence to a common level of competitiveness has been on a decreasing trend
over the whole period. The speed of convergence increased during the period of the Asian Financial Crisis, which was at the be-
ginning of the sample period but slowed in the period of the Global Financial Crisis, at the end of the sample period. In both cases, the
less competitive banking markets converged faster than the more competitive ones. The message for policy is that the process of
financial integration within the ASEAN-5 is running its own course uninterrupted by two financial crises. The banking market is
finding its own balance between stability and competition and the policy of encouraging greater financial integration has been
moderately successful. However, it has also to be recognised that global financial shocks have the capacity to reduce the level of
competitiveness and slow the process of convergence. A policy of common regulation and greater intra-regional banking market
integration may create a stronger resilience to external financial shocks.

Acknowledgements

We are grateful to conference participants of the fourth Applied Financial Modelling Conference, Deakin University 1–2 February
2018, and to an anonymous referee for helpful comments. All remaining errors are ours entirely.

Appendix A

Step results for Johansen’s multivariate co-integration test on ASEAN-5’s interest rates.
See Tables A1–A3

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Table A1
ADF unit roos test for Deposit Rate (DR) and Lending Rate (LR).

unit-root tests at levels

variables constant and trend variables constant and trend K

DR1 −2.34 LR1 −2.82 2

DR2 −2.13 LR2 −2.74 2
DR3 −2.60 LR3 −1.96 2
DR4 −1.12 LR4 −1.43 2
DR5 −2.05 LR5 −1.94 2
5% critical values −3.60

unit-root tests at first differences

variables None variables None K

** **
ΔDR1 −4.99 ΔLR1 −4.81 1
ΔDR2 −3.43** ΔLR2 −2.94** 1
ΔDR3 −4.06** ΔLR3 −4.13** 1
ΔDR4 −3.54** ΔLR4 −4.40** 1
ΔDR5 −2.75** ΔLR5 −2.90** 1
5% critical values −1.95

** Denotes significance at 5%.

Table A2
Test statistics and choice criteria for selecting the order of the VAR.

Variables included in the unrestricted VAR: dr1, dr2, dr3, dr4, dr5

order LL AIC SBC

*
2 −58.07 10.77 13.50
1 −122.34 13.85 15.34

Variables included in the unrestricted VAR: Lr1, Lr2, Lr3, Lr4, Lr5

order LL AIC SBC

*
2 −10.56 6.24 8.98
1 −75.20 9.56 11.05

* The optimal lag length in VAR model of 2 is choosen based on the priciple of minization of AIC and SBC criteria.

Table A3
Model selection regarding the deterministic components in the multivariate system based on the Pantula principle.

The Pantula principle for the Deposit Rate proxy variable: k = 2

H0 r n-r model 1 model 2 model 3 model 4 model 5

λ max test 0 5 51.74 52.29 47.83 72.06 71.24

1 4 27.28 32.86 32.55 45.39 34.25
2 3 23.21 26.26 25.97 31.86 22.20
3 2 9.09** 19.56 17.75 20.93 15.95
4 1 2.23 7.90** 5.17 8.29** 7.89
λ trace test 0 5 113.55 138.87 129.27 178.53 151.54
1 4 61.82 86.58 81.44 106.47 80.29
2 3 34.53 53.72 48.89 61.08 46.05
3 2 11.32** 27.46 22.92 29.22 23.84
4 1 2.23 7.90** 5.17 8.29** 7.89

(continued on next page)

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Table A3 (continued)

The Pantula principle for the Loan Rate proxy variable: k = 2

H0 r n-r model 1 model 2 model 3 model 4 model 5

λ max test 0 5 45.96 61.12 60.23 60.59 53.72

1 4 29.05 35.62 30.37 34.01 30.62
2 3 14.59** 28.34 28.28 28.46 25.02
3 2 7.17 12.05** 11.25** 16.07** 15.97
4 1 0.15 4.36 0.44 8.46 6.56
λ trace test 0 5 96.92 141.49 130.57 147.59 131.88
1 4 50.96 80.37 70.34 86.99 78.15
2 3 21.91** 44.75 39.97 52.99 47.54
3 2 7.32 16.41** 11.69** 24.53** 22.52
4 1 0.15 4.36 0.44 8.46 6.56

Model 1: No intercept or trend in Cointegrating Equation (CE) or the short-run model (the VAR model).
Model 2: Intercept (no trend) in CE, no intercept or trend in VAR.
Model 3: Intercept in CE and VAR, no trends in CE and VAR.
Model 4: Intercept in CE and VAR, linear trend in CE, no trend in VAR.
Model 5: Intercept and quadratic trend in the CE intercept and linear trend in VAR.
The model-selection procedure comprises moving from the most restrictive model, at each stage comparing the trace test statistic to its critical value,
and stopping only when it is concluded for the first time that the null hypothesis of no cointegration is not rejected. Model 1 is choosen based on the
Pantula principle.
** denotes significance at 5%.

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