Openness and Geographic Neutrality: How Do They Contribute to International Banking Integration?

The aim of this article is to develop new international financial integration indicators together with their determinants: financial openness and regularity (balance) of bilateral financial flows. The study s contribution is based on the definition of the Standard of Perfect Financial Integration (SPFI). This standard characterizes the scenario attainable when financial flows are not geographically biased, and cross-border asset trade is not affected by home bias. We assess the gap between a hypothetical scenario of geographic neutrality and the current level of financial integration, along with both of its components. The empirical application to the banking systems of 18 countries-accounting for 83% of international banking markets-over the 1999-2006 period enables us to conclude that the level of financial integration has advanced rapidly over the last few years, and is close to 50% as of 2006, i.e., we are halfway to the SPFI. However, notable differences among countries are both persistent and growing, and the integration level achieved for each banking system differs when assessed from the financial inflows or outflows perspective.