REPUBLIKA.CO.ID, JAKARTA -- Association of Southeast Asian Nations (ASEAN) will face financial integration in 2020. Ratings services Standard & Poor's (S&P) reports that the process will not be entirely smooth.

The report, titled ASEAN Financial Integration: The Long Road To Bank Consolidation, says full integration could spur the emergence of major banks that can compete with large banks outside the region. Better economies of scale would also make financial systems within the region more efficient. Along with the improvement of financial infrastructure in each country, Standard & Poor's believes the integration will make the banking sectors more resilient to external shocks.

"We don't expect the integration to be entirely smooth because, as countries liberalize their banking industries, competition will intensify. Trends that not all local players welcome," said Standard & Poor's credit analyst Chris Lee in a press release, Tuesday, November 11. "Integration will also increase the risk of contagion and spillover effects within the region; when one system gets in trouble, it will affect other systems too. In addition, the varying pace of liberalization and divergent regulatory frameworks among ASEAN countries complicate the industry's consolidation."

The formation of the ASEAN Economic Community (AEC), which is scheduled to take effect in 2015, to liberalize the flow of goods, services, investment, capital, and skilled labor between the countries. Greater intra-ASEAN trade could encourage banks to expand regionally to better serve their clients.

S&P believes that the ASEAN Banking Integration Framework (ABIF) will pave the way for future integration of the ASEAN banks, and banks are already preparing to leverage the opportunities from increased trade flows in the region. The major banks in Malaysia and Singapore have been the most active in expanding regionally. Thai banks are also expanding, although they are focusing more on the Greater Mekong subregion. Indonesian and Philippines banks, on the other hand, are playing defense and strengthening their domestic networks.

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