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Economic Papers Vol.6 No.1(3)

Economic Research Institute (Institute for Monetary & Economic Research(tel: 82-2-759-5407, 5421 fax: 82-2-759-5410)) 2003.07.14 2476

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      


  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.