Effects of economic freedom on bank efficiency, output reallocation and profit convergence in the Asean-5 banking sector
This thesis consists of three stand-alone, yet inter-related studies that delve into the underlying dynamics concerning economic freedom, bank efficiency, output reallocation and profitability convergence. Notably, these studies look into the impacts that different sources of economic freedom hav...
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Banks and banking - Indonesia Banks and banking - Thailand Banks and banking - Singapore Yap, Woon Kan Effects of economic freedom on bank efficiency, output reallocation and profit convergence in the Asean-5 banking sector |
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This thesis consists of three stand-alone, yet inter-related studies that delve into the
underlying dynamics concerning economic freedom, bank efficiency, output reallocation
and profitability convergence. Notably, these studies look into the impacts that different
sources of economic freedom have on the banking sector from various perspectives. The
empirical analyses of these studies are carried out by employing an identical sample,
which comprises 135 banks operating in the ASEAN-5 countries from 2010 to 2015.
The first study examines the impacts of economic freedom on bank cost efficiency,
thereafter, the manners in which these freedom-induced impacts are conditioned by the
prevailing rule of law, are duly ascertained. To this end, the rule of law is found to have
important threshold effects on the impact of economic freedom on bank cost efficiency.
A smaller sized-government is uncovered to reduce bank cost efficiency unless a certain
level of the rule of law is observed. This indicates that a contraction of fiscal spending to
reduce the government size, is generally found to impair bank cost efficiency. However,
the reduction in cost efficiency is mitigated when there is sufficient protection of
creditors’ rights and debt recovery process, measured by the rule of law.
Similarly, the positive effects that a liberalised credit market has on bank cost efficiency
is not apparent until a certain level of the rule of law is observed. This suggests that
deregulation without sufficient regulatory forces is expected to bring about issues on
moral hazard and excessive risk-taking, which subsequently lead to lower bank cost
efficiency unless the rule of law is observed to a certain degree. As a result, reforms to
promote a greater level of economic freedom should be preceded by policies that foster
the rule of law. The second study extends the first study’s objective by ascertaining how economic
freedom, through the moderation of cost inefficiency, eventually affects allocative
efficiency of the ASEAN-5 banking sectors as exemplified by the reallocation of banking
outputs or the factors of production. Firstly, the findings of this study affirm the
prevalence of an efficient output reallocation mechanism that is underlying the ASEAN-
5 banking sectors. Such a conclusion is made when the reallocative effects instigated by
competitive pressure, are found to be proportional to bank cost inefficiency.
Therefore, upon coalescing the findings of the first and second study, conclusions can be
drawn about the effects of economic freedom on the reallocation of banking outputs.
Once the rule of law has been observed to a certain degree, a higher level of freedom in
the credit markets does not only improve bank cost efficiency as revealed in the first
study but it also eases the competitive pressure that saddles the incumbent banks. This
suggests that relaxing the restrictions on banking activities is expected to enlarge the
bankable segment. As a result, the need for banks to compete among themselves abates.
On the other hand, despite the reduced bank cost efficiency following a reduction in
government size as uncovered in the first study, the underlying efficient output
reallocation mechanism will ensure that the least cost efficient banks are the first ones to
be displaced. Hence, this eventually increases the overall stability of the banking sectors
in the long-run.
Lastly, the third study of this thesis examines how economic freedom facilitates the betaconvergence
of bank profitability to the industry’s long-run equilibrium, which is the
level that all incumbent banks tend to, upon behaving competitively. This arguably
constitutes an alternate approach to the second study that evaluates the contribution of
economic freedom towards fostering allocative efficiency in the banking sector. While
the second study deems the banking sector allocatively efficient when banking outputs
are optimally reallocated, the third study embodies the neo-classical prediction that
allocative efficiency only transpires when banks’ performances equalise.
The results yielded from this study show that the ASEAN-5 banking sectors are generally
competitive as both bank profits and the ROAA are found to beta-converge to a
competitive level. Although there is no evidence that the pace of convergence is
significantly determined by the prevailing level of economic freedom, there are certain
thresholds for both the extent of freedom in the credit markets and the size of government,
to satisfy, in order for bank profitability to beta-converge significantly.
Incidentally, the findings yielded from all of the empirical studies encapsulated in this
thesis stand up to the tests for robustness, which include: 1) varying the estimation
strategies used; 2) censoring the sample and 3) altering the proxies used for the variables
of interest. Therefore, the conclusions generated from the findings of this thesis are
robust. |
| format |
Thesis |
| author |
Yap, Woon Kan |
| author_facet |
Yap, Woon Kan |
| author_sort |
Yap, Woon Kan |
| title |
Effects of economic freedom on bank efficiency, output reallocation and profit convergence in the Asean-5 banking sector |
| title_short |
Effects of economic freedom on bank efficiency, output reallocation and profit convergence in the Asean-5 banking sector |
| title_full |
Effects of economic freedom on bank efficiency, output reallocation and profit convergence in the Asean-5 banking sector |
| title_fullStr |
Effects of economic freedom on bank efficiency, output reallocation and profit convergence in the Asean-5 banking sector |
| title_full_unstemmed |
Effects of economic freedom on bank efficiency, output reallocation and profit convergence in the Asean-5 banking sector |
| title_sort |
effects of economic freedom on bank efficiency, output reallocation and profit convergence in the asean-5 banking sector |
| publishDate |
2020 |
| url |
http://psasir.upm.edu.my/id/eprint/85502/1/SPE%202020%2013%20ir.pdf http://psasir.upm.edu.my/id/eprint/85502/ |
| _version_ |
1720438502213025792 |
| spelling |
my.upm.eprints.855022021-12-15T01:46:48Z http://psasir.upm.edu.my/id/eprint/85502/ Effects of economic freedom on bank efficiency, output reallocation and profit convergence in the Asean-5 banking sector Yap, Woon Kan This thesis consists of three stand-alone, yet inter-related studies that delve into the underlying dynamics concerning economic freedom, bank efficiency, output reallocation and profitability convergence. Notably, these studies look into the impacts that different sources of economic freedom have on the banking sector from various perspectives. The empirical analyses of these studies are carried out by employing an identical sample, which comprises 135 banks operating in the ASEAN-5 countries from 2010 to 2015. The first study examines the impacts of economic freedom on bank cost efficiency, thereafter, the manners in which these freedom-induced impacts are conditioned by the prevailing rule of law, are duly ascertained. To this end, the rule of law is found to have important threshold effects on the impact of economic freedom on bank cost efficiency. A smaller sized-government is uncovered to reduce bank cost efficiency unless a certain level of the rule of law is observed. This indicates that a contraction of fiscal spending to reduce the government size, is generally found to impair bank cost efficiency. However, the reduction in cost efficiency is mitigated when there is sufficient protection of creditors’ rights and debt recovery process, measured by the rule of law. Similarly, the positive effects that a liberalised credit market has on bank cost efficiency is not apparent until a certain level of the rule of law is observed. This suggests that deregulation without sufficient regulatory forces is expected to bring about issues on moral hazard and excessive risk-taking, which subsequently lead to lower bank cost efficiency unless the rule of law is observed to a certain degree. As a result, reforms to promote a greater level of economic freedom should be preceded by policies that foster the rule of law. The second study extends the first study’s objective by ascertaining how economic freedom, through the moderation of cost inefficiency, eventually affects allocative efficiency of the ASEAN-5 banking sectors as exemplified by the reallocation of banking outputs or the factors of production. Firstly, the findings of this study affirm the prevalence of an efficient output reallocation mechanism that is underlying the ASEAN- 5 banking sectors. Such a conclusion is made when the reallocative effects instigated by competitive pressure, are found to be proportional to bank cost inefficiency. Therefore, upon coalescing the findings of the first and second study, conclusions can be drawn about the effects of economic freedom on the reallocation of banking outputs. Once the rule of law has been observed to a certain degree, a higher level of freedom in the credit markets does not only improve bank cost efficiency as revealed in the first study but it also eases the competitive pressure that saddles the incumbent banks. This suggests that relaxing the restrictions on banking activities is expected to enlarge the bankable segment. As a result, the need for banks to compete among themselves abates. On the other hand, despite the reduced bank cost efficiency following a reduction in government size as uncovered in the first study, the underlying efficient output reallocation mechanism will ensure that the least cost efficient banks are the first ones to be displaced. Hence, this eventually increases the overall stability of the banking sectors in the long-run. Lastly, the third study of this thesis examines how economic freedom facilitates the betaconvergence of bank profitability to the industry’s long-run equilibrium, which is the level that all incumbent banks tend to, upon behaving competitively. This arguably constitutes an alternate approach to the second study that evaluates the contribution of economic freedom towards fostering allocative efficiency in the banking sector. While the second study deems the banking sector allocatively efficient when banking outputs are optimally reallocated, the third study embodies the neo-classical prediction that allocative efficiency only transpires when banks’ performances equalise. The results yielded from this study show that the ASEAN-5 banking sectors are generally competitive as both bank profits and the ROAA are found to beta-converge to a competitive level. Although there is no evidence that the pace of convergence is significantly determined by the prevailing level of economic freedom, there are certain thresholds for both the extent of freedom in the credit markets and the size of government, to satisfy, in order for bank profitability to beta-converge significantly. Incidentally, the findings yielded from all of the empirical studies encapsulated in this thesis stand up to the tests for robustness, which include: 1) varying the estimation strategies used; 2) censoring the sample and 3) altering the proxies used for the variables of interest. Therefore, the conclusions generated from the findings of this thesis are robust. 2020-01 Thesis NonPeerReviewed text en http://psasir.upm.edu.my/id/eprint/85502/1/SPE%202020%2013%20ir.pdf Yap, Woon Kan (2020) Effects of economic freedom on bank efficiency, output reallocation and profit convergence in the Asean-5 banking sector. Doctoral thesis, Universiti Putra Malaysia. Banks and banking - Indonesia Banks and banking - Thailand Banks and banking - Singapore |
| score |
13.211869 |