Navigating integration through rising complexity: convergence dynamics in the ASEAN banking markets

This study examines the evolving convergence of bank cost efficiency in ASEAN
from 1994 to 2022, focusing on the determinants influencing this trend during distinct
periods. We aim to unravel the progression of convergence drivers and their
policy implications. We employ the true fixed effect stochastic frontier approach
(SFA) to estimate bank cost efficiency and identify a movement toward uniform
efficiency across ASEAN banks using β-convergence and σ-convergence analyses.
By examining conditional β-convergence in various sub-periods, we found that the
initial convergence (1994–2000) was driven by economic growth and regulation,
particularly aiding less developed economies. Post-crisis (2001–2009), banks in
wealthier countries led efficiency gains, albeit with growing barriers from market
concentration and regulatory intensity. As the sector matured (2010–2015), traditional
drivers like GDP growth and regulation attenuated in influence, while bank
size and national wealth supported further convergence. In the latest phase (2016–
2022), traditional convergence drivers waned, signalling a shift in the banking
landscape shaped by potential new factors such as fintech and consumer behaviour
changes. The evolving nature of these determinants highlights the need for ASEAN
banking policies to adapt proactively. Policymakers should consider flexible, forward-
looking regulations that support efficiency convergence and sectoral integration
amidst a rapidly changing financial landscape.