Bank Competition and International Financial Integration : Evidence Using a New Index

In the debate on the benefits and costs of international financial integration recent literature has emphasized thresholds in the development of domestic markets as preconditions to benefitting from international integration. This paper offers an alternative view - that of development of competition in domestic markets as an aide to de-facto openness. Lack of competition in domestic financial systems may prevent countries from reaping the benefits of international integration simply because they prevent countries from being integrated in a meaningful way - that of price equalization. Using a new index of de facto financial openness, this paper explores the trends in and determinants of cross border integration of interbank markets. It finds a strong link between greater competitiveness in domestic banking and international integration. The level of de jure controls, volatility and institutions matter for price integration but their importance differs between developed and developing countries