Deregulation and Efficiency: The Case of Private Korean Banks
This paper examines the productive efficiency of a sample of private Korean banks
over the 1985 to 1995 time period. The goal of the analysis is to identify the key
determinants of Korean bank efficiency (inefficiency) following the program of
deregulation initiated by the government in the early 1980s and augmented in the early
1990s. Using the stochastic frontier cost function approach, efficiency scores were
determined for each bank in the sample. A second stage efficiency regression was then
estimated to identify the key determinants of operating efficiency. In general, the results
show that banks with higher rates of asset growth, fewer employees per million won of
assets, larger amounts of core deposits, and lower expense ratios were more efficient. In
addition, banks which branched nationwide were found to be more efficient. The financial
deregulation of 1991 was found to have had little or no significant effect on the level of
sample bank efficiency.