The purpose of this dissertation is to explain differences in the efficiency of Korean banks in terms of ownership and market structures. It reflects concern that when financial markets are opened to foreign competition, inefficient Korean banks may not be competitive.
Earlier empirical studies of the impact of ownership and market structures on bank efficiency have not produced consistent results. One reason may be the use of profit rates, firm values, or expenditures as measures of bank performance, which lead to ambiguous predictions. In this dissertation, performance is measured as cost efficiency instead.
Using panel data on 26 banks for the 1985-94 period, time-varying and rank-varying bank-specific cost efficiency is measured following Cornwell et al. Each bank's efficiency is compared to that of the most efficient bank in any given year, but no comparisons across periods are possible. To obtain these comparisons, each bank's efficiency is computed with respect to that of the most efficient observation in the panel (a private provincial bank in 1990). Generally, the private provincial banks are most efficient, followed by the specialized state-owned banks, and the largest nationwide commercial banks are least efficient (although the gap decreases).
Bank performance as cost efficiency is then explained by variables that reflect degrees of market concentration (Herfindahl indexes and market shares) and ownership concentration, differences between private and state-owned banks, and the impact of changes in the economic environment (bank wages and interest rates). Several hypotheses are not rejected. First, efficiency increases as market concentration declines and competition increases. Second, efficiency increases with the level of control of the largest share-holders, as ability to monitor managers increases. Third, efficiency declines as bank wages increase ahead of productivity due to unionization. The dissertation could not reject the hypothesis that private banks are more efficient than state-owned banks. This reflects the impact of repressive regulation particularly on the nationwide banks, as the government appoints their chairmen and credit is directed toward priority activities. Barriers to entry and absence of a threat of bankruptcy further contribute to the utility-maximizing behavior of management and reduce efficiency.