Performance Comparisons and the Role of Restructuring for Foreign and Domestic Banks

Abstract

The aggregate performance of the banking industry depends on the underlying micro-level dynamics within that industry - adjustments within banks, reallocations between banks, entries of new banks, and exits of existing banks. This paper develops a generalized Bennet (1920) dynamic decomposition and applies it to the return on equity of foreign and domestic commercial banks in Korea from 1994 to 2005. The sample corresponds to the before, during, and after the Asian financial crisis, which encompasses the final stages of a long process of deregulation and privatization in the Korean banking industry. Our findings reveal that foreign banks experienced a "global advantage" before and during the Asian crisis, but Korean domestic banks enjoyed a "home-field advantage" after the crisis. Moreover, the overall performance of Korean domestic banks largely reflected individual bank efficiencies, except during the Asian financial crisis when restructuring played a more important role on the average bank's performance.

Keywords: commercial banks, profitability, foreign banks and global advantage hypothesis, Benet decomposition of banking industry dynamics

JEL Classification: E5, G2