Financial integration is an important part of ASEAN's goal to establish an ASEAN Economic Community (AEC). In 2007, the member states' heads of state/government endorsed the AEC Blueprint that outlines the path to establishing the AEC by 2015. The AEC Blueprint comprises far-reaching plans for financial services liberalization among member states as well as measures aimed at fostering capital market development and integration, including a dismantling of capital account restrictions in order to achieve a "freer flow of capital" across ASEAN. Numerous working committees have been negotiating the modes of liberalization and schedules. The ASEAN central bank governors are currently devising a framework for banking integration that will allow qualified ASEAN banks to operate across the region.
A study published in April 2013 jointly by the Asian Development Bank (ADB) and the ASEAN Secretariat posits that the formation of the AEC "will benefit from the successful liberalization of the capital account and the domestic financial market in individual countries, and from the ASEAN-wide integration of financial markets and institutions supported by regulatory harmonization and the strengthening of policy coordination among the member states" (ADB and ASEAN 2013, p. 1). (1) While financial integration can certainly benefit the region and contribute to financial development in the less developed ASEAN economies, there are also substantial risks that come with capital account and financial liberalization. Liberalization will also have far-reaching consequences for national policy autonomy. The financial stability risks as well as implications of close financial integration for policy autonomy have been highlighted by the recent European experiences. Against the backdrop of the European crisis, this article thus reflects on the merits and risks of (regional) financial integration and underscores the great importance of designing an appropriate regulatory and supervisory framework to safeguard financial stability in an integrated area.
The next section will look into the European experiences with financial integration since the 1970s and discuss how regional financial integration contributed to the European crisis and what could have been done differently to prevent it. Section III will then turn to the developing framework for ASEAN financial integration and discuss implications and lessons of the European experiences. Section IV concludes.
II. European Financial Integration and the European Crisis of 2010--
11.1 Background to European Financial Integration
From the second half of the 1970s, European policymakers increasingly worked towards an integration of European financial markets, which was widely regarded as being conducive to trade integration and expected to unleash the growth potential of member countries. European financial integration was fostered through market deregulation, which was "shaped both by the abolition of capital account restrictions and the adoption of common legislative standards" (Buch and Heinrich 2003, p. 32). Although some European countries had lifted restrictions on capital flows on an individual basis earlier, the liberalization of capital controls across the European Community was completed only in the early 1990s as the Single European Act of 1986 was implemented to remove all legal barriers to an internal market. Several countries, including Belgium (1991), France (1990), Greece (1994), Luxembourg (1990), Portugal (1992) and Spain (1992), maintained capital controls until then (Table 1). (2)
The harmonization of regulation and financial integration were propelled by the European Community's First and Second Banking Directives. The First Banking Directive on The Coordination of Laws, Regulations and Administrative Provisions Relating to the Taking Up and Pursuit of Credit Institutions, which was adopted in 1977, was the first step towards the harmonization of banking regulation. …