The Non-Monotonic Relationship Between Financial Integration and Cost Efficiency: Evidence From East Asian Commercial Banks

This is the first study to investigate how financial integration affects bank cost efficiency by applying the non-monotonic stochastic frontier model developed by Wang (2002) to a sample of East Asian commercial banks over the period 1997–2014. We consistently report a non-monotonic association between financial integration and bank cost efficiency. Financial integration improves bank cost efficiency but then becomes efficiency-impeding. Our empirical results support the existence of an optimal level of financial integration and validate the IMF’s nuanced ‘institutional view’ toward full capital account openness as well as being meaningful to further financial integration in East Asia.