ASEAN has recently agreed on a new banking framework to liberalize the banking industry in the region and integrate the market. Many countries impose severe restrictions on foreign ownership of banks. Under the ASEAN Banking Integration Framework, some banks in the member nations will be able to open up banks in a partner country under the same terms as domestic financial institutions. This will allow funds to transfer easier between nations and help to facilitate trade.
The agreement is just a framework. The goal of the framework is not complete integration like the European Union. It is a partial integration where individual member states makes a series bilateral agreements with other member states. Following the agreement, the ASEAN member nations begin bilateral talks with other members to create detailed terms of banking operations.
The ASEAN Banking Integration Framework is a set of principles and goals that are agreed by the member nations. The ASEAN Banking Integration Framework has three goals. The first goal is elimination of entry barriers against foreign institutions. The second goal is to eliminate discrimination 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 nations. The only binding requirement is that each country must host one foreign bank by 2018.
The process of integration will not be easy or quick. Individual member states have not developed the same level of banking sophistication and regulations are not the same in every country. Large financial centers like Singapore and Malaysia have a well-developed financial market and integrate well into the world’s advance nations. Laos, Cambodia, and Myanmar have small and underdeveloped banking operations. In between the two groups are nations like Thailand, Indonesia, and Vietnam to bridge the gap.
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 the market.
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.
And lastly, there is a fear that integrated financial markets can destabilize the country by contagion effect. There is a fear that financial irresponsibility of one member nation will easily spread to a neighboring country if there are no firewalls.
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.