TITLE : [Economic Papers 6-1]
The Determinants of
Foreign Banks´ Entry in Korea and Its Effects
on
Korean Domestic
Banks´ Performance
AUTHOR : Byungyoon Lee
CONTACT : Institute for Monetary
& Economic
Research
(tel: 82-2-759-5407, 5421 fax: 82-2-759-5410)
ATTACH : EP6-1-3.pdf
Summary:
This paper investigates the determinants of foreign banks´ entry in
Korea and its effects on domestic banks´ management performance. We find that,
before the financial crisis in Korea, foreign banks invested in Korea to support
companies of their country of origin, which operated in Korea. But after the
crisis, the level of financial development and economic growth of foreign banks´
country of origin became main factors determining the level of investment by
foreign banks in Korea. This implies that, after the crisis, due to the improved
financial supervisory system and bank restructuring in the Korean financial
market, the financial environment in Korea has changed to be favorable to
foreign banks from countries with well-developed financial systems. It is also
empirically shown that the foreign banks´ entry of the Korean banking market
helps to improve the cost efficiency of Korean domestic banks, while it does not
affect their profitability. From this result, we can see that Korean
government´s policy of the relaxation of entry barriers against foreign banks
after the mid-1990´s was helpful for the improvement of the cost efficiency of
Korean domestic banks by indtroducing competitive pressure from foreign banks in
the Korean banking market.