The Performance of Domestic and Foreign Banks: The Case of Korea and the Asian Financial Crisis

This paper considers the performance of banks, domestic and foreign, in Korea prior to, during, and immediately after the Asian financial crisis, examining how the profitability of those banks differed and identifying factors that explain why those differences existed. The performance of Korean banks deteriorated dramatically in 1998 with most banks recovering somewhat in 1999. Foreign banks did not experience the same negative effect on their returns on assets and equity as a rule. Several standard findings emerge. For example, equity to assets correlates positively with domestic, but not foreign, bank performance, as measured by the returns on assets and equity, even when the government recapitalized institutions that were performing quite badly. Also, foreign-currency deposits significantly and negatively correlate with domestic Korean bank performance, although only in the post-crisis period for regional banks. In sum, the domestic Korean banks suffered more severely from the Asian financial crisis than foreign banks.

An 'Ideal' Decomposition of Industry Dynamics: An Application to the Nationwide and State Level U.S. Banking Industry

This paper considers the aggregate performance of the banking industry, applying a modified and extended dynamic decomposition of bank return on equity. The aggregate performance of any industry depends on the underlying microeconomic dynamics within that industry . adjustments within banks, reallocations between banks, entry of new banks, and exit of existing banks. Bailey, Hulten, and Campbell (1992) and Haltiwanger (1997) develop dynamic decompositions of industry performance. We extend those analyses to derive an ideal decomposition that includes their decomposition as one component. We also extend the decomposition, consider geography, and implement decomposition on a state-by-state basis, linking that geographic decomposition back to the national level. We then consider how deregulation of geographic restrictions on bank activity affects the components of the state-level dynamic decomposition, controlling for competition and the state of the economy within each state and employing fixed- and random-effects estimation for a panel database across the fifty states and the District of Columbia from 1976 to 2000.

Foreign and Domestic Bank Performances: An Ideal Decomposition of Industry Dynamics

The aggregate performance of the banking industry depends on the underlying microlevel dynamics within that industry. adjustments within banks, reallocations between banks, entries of new banks, and exits of existing banks. This paper develops a generalized ideal dynamic decomposition and applies it to the return on equity of foreign and domestic commercial banks in Korea from 1994 to 2000. The sample corresponds to the Asian financial crisis and the final stages of a long process of deregulation and privatization in the Korean banking industry. The comparison of our findings reveals that the overall performance of Korean banks largely reflects individual bank efficiencies, except immediately after the Asian financial crisis where restructuring played a more important role on average bank performance. Moreover, Korean regional banks started the restructuring process about one year before the Korean nationwide banks. Foreign bank performance, however, largely reflected individual bank efficiencies, even immediately after the Asian financial crisis.

An 'Ideal' Deconposition of Industry Dynamics: An Application to the Nationwide and State Level U.S. Banking Industry

This paper considers the aggregate performance of the banking industry, applying a modified and extended dynamic decomposition of bank return on equity. The aggregate performance of any industry depends on the underlying microeconomic dynamics within that industry --- adjustments within banks, reallocations between banks, entry of new banks, and exit of existing banks. Bailey, Hulten, and Campbell (1992) and Haltiwanger (1997) develop dynamic decompositions of industry performance. We extend those analyses to derive an ideal dynamic decomposition that includes their dynamic decomposition as one component. We also extend the decomposition, consider geography, and implement decomposition on a state-by-state basis, linking that geographic decomposition back to the national level. We then consider how deregulation of geographic restrictions on bank activity affects the components of the state-level dynamic decomposition, controlling for competition and the state of the economy within each state and employing fixed- and random-effects estimation for a panel database across the fifty states and the District of Columbia from 1976 to 2000.

Are Some Indian Bank Too Large? A Examination of Size Efficiency in Indian Banking

In this paper we use data from the years 1997 through 2003 to evaluate the size efficiency of Indian banks. Following Maindiratta (1990) we consider a bank to be too large if breaking it up into a number of smaller units would result in a larger output bundle than what could be produced from the same input by a single bank. When this is the case, the bank is not size efficient. Our analysis shows that many of the banks are, in deed, too large in various years. We also find that often a bank is operating in the region of diminishing returns to scale but is not a candidate for break up.

Has Deregulation Affected Births, Deaths, and Marriages in the U.S. Commercial Banking Industry?

Regulatory change not seen since the Great Depression swept the U.S. banking industry beginning in the early 1980s and culminating with the Interstate Banking and Branching Efficiency Act of 1994. Banking analysts anticipated dramatic consolidation with large numbers of mergers and acquisitions. Less well documented, but equally important, was the continuing entry of new banks, tempering the decline in the overall number of banking institutions. This paper examines whether deregulation affected bank new-charter (birth), failure (death), and merger (marriage) rates during the 1980s and 1990s after controlling for bank performance and state economic activity. We find evidence that intrastate deregulation stimulated births and marriages, but not deaths. Moreover, we find little evidence that interstate deregulation affected births, deaths, or marriages, except that the marriage rate rose after the implementation of the Interstate Banking and Branching Efficiency Act. Finally, pair-wise temporal causality tests among births, deaths, and marriages show that mergers temporally lead new charters and that failures lead mergers (a demonstration effect).

Has Deregulation Affected Births, Deaths, and Marriages in the U.S. Commercial Banking Industry?

Regulatory change not seen since the Great Depression swept the U.S. banking industry beginning in the early 1980s and culminating with the Interstate Banking and Branching Efficiency Act of 1994. Banking analysts anticipated dramatic consolidation with large numbers of mergers and acquisitions. Less well documented, but equally important, was the continuing entry of new banks, tempering the decline in the overall number of banking institutions. This paper examines whether deregulation affected bank new-charter, failure, and merger rates during the 1980s and 1990s after controlling for bank performance and state economic activity. We find evidence that intrastate deregulation stimulated new charters and mergers, but not failures. Moreover, we find little evidence that interstate deregulation affected new charters, failures, or mergers.

Liberalization, Ownership, and Efficiency in Indian Banking: A Nonparametric Approach

This paper empirically estimates and analyzes various efficiency scores of Indian banks during 1997-2003 using data envelopment analysis (DEA). During the 1990s India's financial sector underwent a process of gradual liberalization aimed at strengthening and improving the operational efficiency of the financial system. It is observed, none the less, that Indian banks are still not much differentiated in terms of input or output oriented technical efficiency and cost efficiency. However, they differ sharply in respect of revenue and profit efficiencies. The results provide interesting insight into the empirical correlates of efficiency scores of Indian banks. Bank size, ownership, and the fact of its being listed on the stock exchange are some of the factors that are found to have positive impact on the average profit efficiency and to some extent revenue efficiency scores are. Finally, we observe that the median efficiency scores of Indian banks in general and of bigger banks in particular have improved considerably during the post-reform period.