Economic Liberalization and Bank Fragility: Empirical Evidence from ASEAN Countries

Abstract

This paper uncovers the effects of economic liberalization on bank fragility using the panel data of ASEAN countries. Economic liberalization is proxied by using the economic freedom index, whereas bank fragility is measured by the inverse of the z-score. Our empirical results show that economic liberalization reduces the likelihood of bank default. This effect becomes less evident when a country has a higher degree of financial development or confronts more severe uncertainty. Moreover, while financial liberalization plays a decisive role, the effect of trade liberalization is insignificant. Our findings are robust for various estimators, alternative measures of economic liberalization and bank fragility, and when taking into account the endogeneity problem. Our findings suggest several policy implications for the policymakers.

Received: 30 March 2024 / Accepted: 23 June 2024 / Published: 5 July 2024