ASEAN: Removing Barriers to Cross Border Banking

ASEAN has recently announced an agreement on agreed on a framework to liberalize the banking industry in the region. The agreement is called the ASEAN Banking Integration Framework.

The agreement is centered on allowing commercial banks to open branches in a partner country under the same terms as domestic financial institutions. This will increase cross border banking. It is hoped that increased mobility of capital will facilitate trade within the region.

The framework should not be confused with the complete integrated regulatory system that is installed in the European Union. The ASEAN Banking Integration Framework is a set of principles and time frames that are agreed by the member nations. It is a partial integration where individual member states makes a series bilateral agreements with other member states. The announcement is a signal to the member states to begin bilateral talks with other member states implement the principles of the Framework.

The ASEAN Banking Integration Framework has three goals. The first goal is to eliminate entry barriers against foreign institutions. The second goal is to remove discriminatory laws against foreign institutions. The final goal is the regulatory harmonization of banking regulations in the region. The method of achieving these goals are left to the member states. The only binding requirement is that each country must host one foreign bank by 2018.

The process of integration will not be simple or quick. The level of banking sophistication and development among the member states are not the same. Large financial centers like Singapore and Malaysia have a well-developed financial market and integrate well with the world’s advance nations. Laos, Cambodia, and Myanmar have small and underdeveloped banking operations. Nations like Thailand, Indonesia, and Vietnam are bridge between the two groups.

In addition to the development gap, political and protective measures impede agreement on regulations. Indonesia requires foreign banks to have assets comparable to the size of the 200 world’s largest banks. This requirement prevents most banks in ASEAN from entering Indonesia.

Some nations are slow in adopting regulations which allow the integration of the financial markets. This is a result of either local priorities or a fear that their internal markets will be overwhelmed by foreign banks.

Lastly, there is a fear that integrated financial markets can destabilize the country by contagion effect. If one nation is financially irresponsible, the financial problems of that country can spread to a neighboring country without breaks between the two nations.

The ASEAN Economic Community was established to accelerate economic growth in the region by creating a single market and to fully integrate in the global economy. In order to compete with the world’s economic powers, the member states of ASEAN understand that it is in the best interest of the member states to increase economic ties and liberalize their markets.

Liberalizing the banking industry in the region is integral in the effort to increase regional trade and to increase economic development of the member states. While there is fear that removing barriers to cross border banking will increase the chances of economic contagion, the opposite is actually true. A large integrated banking market will better able to withstand economic shocks and help to stabilize the region. In addition, multinational banks does not preclude a domestic banking market.

ASEAN is large enough and culturally varied enough to sustain both multinational banks and small local banks.

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