The Non-Monotonic Relationship Between Financial Integration and Cost Efficiency: Evidence From East Asian Commercial Banks

Posted: 7 Nov 2020

See all articles by Dung Thuy Thi Nguyen

Dung Thuy Thi Nguyen

University of Otago - Department of Accountancy and Finance; Academy of Finance

Ivan Diaz-Rainey

CEFGroup & Department of Accountancy and Finance, University of Otago

Helen Roberts

University of Otago - Department of Accountancy and Finance

Minh Le

Faculty of Finance and Banking, University of Economics and Law, VNU-HCM, Vietnam

Date Written: September 18, 2020

Abstract

This is the first study to investigate how financial integration affects bank cost efficiency by applying the non-monotonic stochastic frontier model developed by Wang (2002) to a sample of East Asian commercial banks over the period 1997–2014. We consistently report a non-monotonic association between financial integration and bank cost efficiency. Financial integration improves bank cost efficiency but then becomes efficiency-impeding. Our empirical results support the existence of an optimal level of financial integration and validate the IMF’s nuanced ‘institutional view’ toward full capital account openness as well as being meaningful to further financial integration in East Asia.

Keywords: non-monotonic model, banks, financial integration, cost efficiency, stochastic frontier

JEL Classification: C14, G21, D24, F36, F38

Suggested Citation

Thuy Thi Nguyen, Dung and Thuy Thi Nguyen, Dung and Diaz-Rainey, Ivan and Roberts, Helen and Le, Minh, The Non-Monotonic Relationship Between Financial Integration and Cost Efficiency: Evidence From East Asian Commercial Banks (September 18, 2020). Available at SSRN: https://ssrn.com/abstract=3694862

Dung Thuy Thi Nguyen (Contact Author)

University of Otago - Department of Accountancy and Finance ( email )

PO Box 56
Dunedin, 9054
New Zealand

Academy of Finance ( email )

8 Phan Huy Chu
Phan Chu Trinh Street
Hanoi
Vietnam

Ivan Diaz-Rainey

CEFGroup & Department of Accountancy and Finance, University of Otago ( email )

Dunedin
New Zealand

Helen Roberts

University of Otago - Department of Accountancy and Finance ( email )

PO Box 56
Dunedin, 9054
New Zealand
6434798072 (Phone)
6434798171 (Fax)

Minh Le

Faculty of Finance and Banking, University of Economics and Law, VNU-HCM, Vietnam ( email )

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