Financial Openness and Bank Development: The Experience of East Asia

Abstract

Abstract: The finance-growth link is being studied extensively over the years. Empirical findings favouring the supply-leading role for financial intermediaries are in line with theoretical models that assigned a special role for intermediaries in rectifying market imperfections. Existing extensions focus on underlying factors that are critical for financial advancement. We investigated the financial openness-bank development link for selected East Asian economies (Indonesia, South Korea, Malaysia, Philippines, Singapore and Thailand). Our panel indicates that financial openness in the region was largely concentrated within the intermediated banking system. In the 1990s, bank openness increased in association with a significant increase in bank credit and intermediation. Additional insights into the experience of each nation show that a direct positive link between bank openness and its activities are traced for Singapore, Indonesia, South Korea, and Thailand. Thus, along the finance-growth paradigms, financial openness is a plus to banking development in East Asia.