The role of activity restrictions on financial intermediation costs in ASEAN countries

Abstract

Purpose The purpose of this study is to examine the role of activity restrictions on the financial intermediation costs in ASEAN countries. Design/methodology/approach This study used the two-step system generalized method of moments approach to tackle the endogeneity problems. The sample consists of 130 banks from ASEAN countries covering the over 2009–2022 period. Findings This study provides valuable insights into various dimensions of activity restrictions within the banking across ASEAN countries. The findings highlight that imposing restrictions on activities such as securities, insurance and real estate can significantly elevate intermediation costs, affecting the overall efficiency of the banking sector. Furthermore, restrictions on ownership lead to higher intermediation costs by limiting operational flexibility, thereby constraining banks’ ability to optimize their financial services. Research limitations/implications The sample of this study is limited to banks in ASEAN countries and focuses only on the regulations restricting banking activities. Practical implications The findings suggest that policymakers should conduct a comprehensive review and potential adjustment of the existing regulatory framework related to restrictions on banking activities to strike an optimal balance between risk mitigation and fostering an environment that enhances banks’ efficiency. In addition, regulators could consider introducing regulatory reforms to ownership-related restrictions to promote greater flexibility and adaptability in the banking sector. Originality/value This research contributes to the field of banking by offering valuable insights for policymakers and regulators in ASEAN countries. It provides empirical evidence on the impact of activity restrictions on financial intermediation costs, highlighting key factors for developing more effective regulatory strategies.