Effects of Economic Freedom on Bank Profit Beta-Convergence in ASEAN-5 Banking Sectors

This study examines the beta-convergence of bank profitability to the long-run equilibrium, which is the level at which all incumbent banks tend toward when behaving competitively. This study also considers the role of economic freedom in bank profitability convergence, which is a necessary development if banking sectors are to integrate. The results show that ASEAN-5 banking sectors are generally competitive because bank profits and return on average assets are found to beta-converge to their respective competitive levels. Although no evidence exists that the pace of convergence is significantly determined by the prevailing level of economic freedom, freedom in the credit markets and the size of governments are required to satisfy certain thresholds if bank profitability beta-converges significantly.