Navigating Integration Through Rising Complexity: Convergence Dynamics in the ASEAN Banking Markets

This study examines the evolving convergence of bank cost efficiency in ASEAN from 1994 to 2022, focusing on the determinants influencing this trend during distinct periods. We aim to unravel the progression of convergence drivers and their policy implications. We employ the true fixed effect stochastic frontier approach (SFA) to estimate bank cost efficiency and identify a movement toward uniform efficiency across ASEAN banks using β-convergence and σ-convergence analyses. By examining conditional β-convergence in various sub-periods, we found that the initial convergence (1994–2000) was driven by economic growth and regulation, particularly aiding less developed economies. Post-crisis (2001–2009), banks in wealthier countries led efficiency gains, albeit with growing barriers from market concentration and regulatory intensity. As the sector matured (2010–2015), traditional drivers like GDP growth and regulation attenuated in influence, while bank size and national wealth supported further convergence. In the latest phase (2016–2022), traditional convergence drivers waned, signalling a shift in the banking landscape shaped by potential new factors such as fintech and consumer behaviour changes. The evolving nature of these determinants highlights the need for ASEAN banking policies to adapt proactively. Policymakers should consider flexible, forward-looking regulations that support efficiency convergence and sectoral integration amidst a rapidly changing financial landscape.