Essays on financial integration, natural disasters, and commercial banks in East Asia
Nguyen, Dung Thi Thuy
The thesis examines the impact of financial integration on commercial banks in East Asia. The thesis comprises three essays examining the relationship between financial integration and bank cost efficiency, financial integration and bank default risk, and the moderating role of financial integration on the impact of natural disasters on bank performance. More specifically, the first essay tests whether there is a non-monotonic relationship between financial integration and bank cost efficiency. A sample of commercial banks from nine East Asian countries over the period 1997–2014 is examined. This is the first study to apply the non-monotonic stochastic frontier model to this relationship. The essay consistently reports a non-monotonic impact of financial integration on bank cost efficiency. Financial integration contributes to the improvement in bank cost efficiency up to a threshold. The model suggests that when the foreign claims are greater than 100% of GDP and when more than 40% of banks are non-domestic, a further increase in financial integration becomes efficiency-impeding. The second essay examines the impact of different forms of financial integration on bank default risk. Using the system generalized method of moments (GMM) and sampling eight East Asian countries during 1999–2014, the essay finds that financial integration lowers bank default risk in the recipient countries. The impact is primarily driven by the foreign claims extended by Asian lenders and the foreign claims extended via local affiliates. These results show that close proximity of lenders and borrowers or ‘local’ knowledge via an affiliate presence alleviates information asymmetry, allowing for effective monitoring and disciplining of the loan relationship. The result supports the fostering of financial integration, promoting deeper intra-regional connectedness throughout East Asia. Where foreign claims come from outside East Asia, policy makers should encourage presence through local affiliates, as this has an equivalent impact. The third essay analyses the impact of natural disasters on commercial bank performance and the moderating impact of financial integration on the relationship. Commercial banks from seven East Asian countries during 1999–2014 are sampled. The system GMM regression reveals that natural disasters significantly lower the deposits ratio but have no contemporaneous relationship with liquidity, credit risk, profitability, and default risk. The essay also shows that foreign banking claims, specifically those extended by Asian lenders, help to alleviate the deposits decline in the aftermath of natural disasters. These results highlight the role of commercial bank deposits and foreign banking claims as sources of finance for post-disaster recovery. The resilience of the Asian foreign claims in the event of local shocks also provides evidence to support deeper intra-regional financial integration in East Asia.
Advisor: Diaz- Rainey, Ivan; Roberts, Helen
Degree Name: Doctor of Philosophy
Degree Discipline: Accountancy and Finance
Publisher: University of Otago
Keywords: "financial integration"; "foreign banking claims"; "natural disasters"; "cost efficiency"; "default risk"; "commercial banks"; "East Asia".
Research Type: Thesis