Efficiency and Competition in Korean Banking

Abstract

Using a translog cost function, we firstly estimate economies of scale and then calculate the bank-specific scale elasticities for Korean banks over the period 2007Q2 to 2011Q2. We find that all National banks operate with significant economies of scale, with bank-specific scale elasticities ranging from 82% to 88%, while half of the Regional banks and Specialized banks also exhibited significant scale economies, with bank-specific scale elasticities averaging around 92% and 83% respectively. Incorporating these bank-specific scale elasticities directly within the model at the second stage of the Panzar-Rosse (1987) approach to measuring market concentration, we find evidence of perfect competition prevailing in Korean banking. This offers a basis for merger policy where there are scale economies to be obtained – reducing average costs – yet having little destabilizing effect on the competitive nature of the industry.

Keywords: Korean banks, Market structure, Scale economies, Efficiency

JEL Classification: C23, C52, G21