Efficiency and competition in Korean banking

Using a translog cost function, we first estimate the economies of scale and then calculate the bank-specific scale elasticities for Korean banks over the period 2007Q2 to 2011Q2. We find that all the National banks operate with significant economies of scale, with bank-specific scale elasticities r...

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Bibliographic Details
Published in:Applied financial economics 2013-05, Vol.23 (10), p.881-890
Main Authors: Hall, Maximilian J. B., Simper, Richard
Format: Article
Language:English
Subjects:
Banking
Banking industry
Banks
Competition
Cost function
Economic models
Economies of scale
efficiency
Elasticity
Korean banks
Market structure
Mergers
Perfect competition
Regional banks
scale economies
South Korea
Studies
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Summary:Using a translog cost function, we first estimate the economies of scale and then calculate the bank-specific scale elasticities for Korean banks over the period 2007Q2 to 2011Q2. We find that all the 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 and Rosse ( 1987 ) approach to measure 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.
ISSN:0960-3107
1466-4305
DOI:10.1080/09603107.2013.776661