The purpose of this paper is to examine the impact of trade openness on the cost of financial intermediation and bank performance. Developed and developing countries are currently pursuing trade openness to achieve higher bank performance with less intermediation costs.
In attaining the study's objectives, several regression methodologies were employed (i.e. system generalized method of moments (GMM), fixed effect, pooled ordinary least squares (OLS) and vector error correction model (VECM)). The authors tested the hypothesis on data of 885 banks from BRICS countries, which span 18 years (2000–2017).
The results from this robust study showed that embedding higher trade openness reduces financial intermediation costs and improves banks' performance. The results remain robust following the use of different estimation methods and alternative variables as proxies. In addition, results were still valid upon considering bank level, industry level and country level as control variables. It was also observed that the relation pattern holds its rigidity during “good” and “bad” times (i.e. the global financial crisis).
The results provide better references for bank regulators, academics and policymakers to take advantage of the low financial intermediation costs resulting from trade openness.
