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

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1 Uvesy of Coeccu Ecoomcs Wokg Papes Depame of Ecoomcs Ocobe 2004 Foeg ad Domesc Bak Pefomaces: A Ideal Decomposo of Idusy Dyamcs Yogl Jeo Ceal Mchga Uvesy Sephe M. Mlle Uvesy of Nevada Las Vegas ad Uvesy of Coeccu Follow hs ad addoal woks a: hp://dgalcommos.uco.edu/eco_wpapes ecommeded Cao Jeo Yogl ad Mlle Sephe M. "Foeg ad Domesc Bak Pefomaces: A Ideal Decomposo of Idusy Dyamcs" Ecoomcs Wokg Papes hp://dgalcommos.uco.edu/eco_wpapes/200446

2 Depame of Ecoomcs Wokg Pape Sees Foeg ad Domesc Bak Pefomaces: A Ideal Decomposo of Idusy Dyamcs Yogl Jeo Ceal Mchga Uvesy Sephe M. Mlle Uvesy of Nevada Las Vegas ad Uvesy of Coeccu Wokg Pape Ocobe Masfeld oad U 063 Sos CT Phoe: Fax: hp://

3 Absac The aggegae pefomace of he bakg dusy depeds o he udelyg mcolevel dyamcs wh ha dusy. adjusmes wh baks eallocaos bewee baks ees of ew baks ad exs of exsg baks. Ths pape develops a geealzed deal dyamc decomposo ad apples o he eu o equy of foeg ad domesc commecal baks Koea fom 994 o The sample coespods o he Asa facal css ad he fal sages of a log pocess of deegulao ad pvazao he Koea bakg dusy. The compaso of ou fdgs eveals ha he oveall pefomace of Koea baks lagely eflecs dvdual bak effceces excep mmedaely afe he Asa facal css whee esucug played a moe mpoa ole o aveage bak pefomace. Moeove Koea egoal baks saed he esucug pocess abou oe yea befoe he Koea aowde baks. Foeg bak pefomace howeve lagely efleced dvdual bak effceces eve mmedaely afe he Asa facal css. Joual of Ecoomc Leaue Classfcao: E5 G2 Keywods: commecal baks pofably foeg baks ad global advaage hypohess

4 . Ioduco Aggegae dusy daa hde mpoa bak fm o pla level dyamcs ha collecvely deeme oveall dusy dyamcs. Tha s he pefomace of he aggegae dusy eflecs he accumulao of he udelyg mcoecoomc dyamcs wh ha dusy -- ha s adjusmes wh baks eallocaos bewee baks ey of ew baks ad ex of exsg baks. The avalably of mco-level esablshme-level daa spawed a sees of appled mcoecoomc eseach especally fo maufacug duses. Tha eseach effo eveals moe heeogeey amog fms wh he same dusy ha bewee duses. The dyamc decomposo of dusy dyamcs ypcally adops he mehod ogally poposed by Baley Hule ad Campbell 992. They develop a algebac decomposo of dusy oal faco poducvy TFP gowh o hee effecs wh bewee ad e-ey effecs. The wh effec measues he cobuo of suvvg fms owad TFP gowh. The bewee o eallocao effec measues he cobuo of chagg make shae of suvvg fms owad TFP gowh whle he e-ey effec measues he cobuo of fms eas o ad exs fom he dusy owad TFP gowh. Halwage 997 exeds Baley Hule ad Campbell 992 ad sepaaes he effecs of fm eas o ad ex fom he dusy. Moeove he also dvdes he bewee effec o wo compoes he shae ad covaace effecs. The shae effec measues he cobuo of he chagg shae of fms whle he covaace effec measues he cobuo of he chagg shae of McGuck 995 descbes he Logudal eseach Daabase LD a he U.S. Bueau of he Cesus upo whch hs eseach eles. Scapea Hemmgs Tessel ad Woo 2002 povde a moe ece dscusso fm-level daabases e OECD coues. 3

5 fms mes he chagg TFP gowh of fms owad TFP gowh. Jeo ad Mlle 2004a exed ha mehod ad develop a deal dyamc decomposo ha hey apply o he U.S. bakg dusy a he aoal ad sae-bysae levels of aggegao. 2 Tha exeso bega by og ha such decomposo mehods shae a commo dex-umbe poblem he choce of he base yea. Baley Hule ad Campbell 992 ad Halwage 997 choose he al yea as he base fo he calculaos. Thus he wh effec measues he chage TFP gowh a he fm level bewee he al ad fal yeas weghed by he al yea s make shae. Jeo ad Mlle 2004a deve a decomposo of wh bewee eallocao ey ad ex effecs whee he wh effec weghs he chage TFP gowh acually he eu o equy he applcao bewee he al ad fal yeas fo each fm by he fm s dusy shae he fal yea. Fally Jeo ad Mlle 2004a defe a deal dyamc decomposo by combg hose wo dyamc decomposos o a smple aveage. Thus he weghg of he wh bewee eallocao ey ad ex effecs all employ smple aveages of he al ad fal yea weghs. I he baga he deal dyamc decomposo of he dusy elmaes he covaace effec deved by Halwage 997. We apply ha decomposo aalyss o he Koea bakg dusy Koea aowde ad egoal baks as well as foeg baks. As such we povde he fs aalyss of he cobug facos o oveall pefomace of baks he Koea bakg dusy measued by eu o equy. Tha aalyss also cosdes dffeeces 2 Glches ad egev 995 employ he deal decomposo mehod he sudy of fm poducvy Isael dusy. Scapea Hemmgs Tessel ad Woo 2002 befly dscuss he Glches ad egev 995 ad Halwage 997 mehods of decomposo og how hey dffe. Jeo ad Mlle 2004a howeve lk he dffeeces o he base-yea weghg ssue. 4

6 pefomace bewee Koea baks ad foeg baks as well as bewee Koea aowde ad egoal baks. Fuhe he aalyss exames dffeeces udelyg causes of bak pefomace befoe dug ad afe he Asa facal css. 3 Seveal coclusos emege. Chages dusy eu o equy lagely eflec chages dvdual bak pefomace he wh effec excep fo Koea aowde ad egoal baks afe he Asa facal css whee he eallocao ad ex effecs domaed. Tha s Koea baks esucued espose o he Asa facal css. Koea egoal baks fs expeeced a lage eallocao effec followed he ex yea by a cease he ex effec. Koea aowde baks espoded o he Asa facal css oe yea lae ha he Koea egoal baks ad lagely hough a eallocao effec wh lle chage he ex effec oo bg o fal. Fally he foeg baks dd o expeece smla eallocao ad ex effecs afe he Asa facal css. The pefomace coued o ely pmaly o he wh effec. The pape ufolds as follows. Seco 2 befly evews he dffeg vews o how foeg baks affec he domesc ecoomy ad descbes he sucue of bakg Koea. Seco 3 oules he devao of he deal dyamc decomposo wh moe deals povded he Appedx. Seco 4 apples he decomposo echque o he Koea bakg dusy cludg foeg baks ad Koea aowde ad egoal baks. Seco 5 cocludes. 2. The Koea Bakg Seco ad he Asa Facal Css The Asa facal css udescoes he mpoace of sog ad sable facal makes fo he maeace of ecoomc developme. I hs egad some aalyss 3 Jeo ad Mlle 2004a exame how bak pofably dffeed ad defy facos ha expla some of hose dffeeces. Domesc Koea baks suffeed moe seveely fom he Asa facal css ha foeg baks. 5

7 ague ha foeg bak pacpao domesc facal makes seghes he domesc ecoomy. Ohe aalyss howeve coed ha he facal sevce dusy possesses publc-good chaacescs ad ha he ufeeed pvae-makes should o compleely cool ced allocao decsos. A eve moe sge vew clams ha sae oweshp ad sae-madaed ced allocao mus sed ced o hose secos mos cucal fo ecoomc developme. The Koea bakg sysem as oed pevously cludes hee classes of suos aowde egoal ad foeg baks. Dug he 960s ad 970s he majo playes he Koea facal sysem wee he aowde baks. egoal baks whch opeae oly he ow povces wh a bach Seoul eeed he scee 967 o ecouage egoally based developme. Plas o deegulae he facal sysem ad place Koea aowde commecal baks he pvae seco bega he ealy 980s. Deegulao hs peod expaded he powe of commecal baks. 4 The goveme s had howeve sll welded a poe foce coollg ees aes o cea ypes of loas ad deposs. Fuhe he goveme s fomal ced polcy coued o favo seleced secos. 5 The fs foeg bak Chase Mahaa eeed he Koea ecoomy 967. The pacpao of foeg baks gew a a good pace houghou he 970s ad 980s bu sablzed he 990s ad he fell somewha afe he Asa facal css. 6 4 Ove 980 o 994 Glbe ad Wlso 998 calculae ha aowde baks expeeced sgfca lage poducvy mpoveme whle egoal baks expeeced mxed esuls. 5 Glbe ad Wlso 998 ague ha he Koea commecal bakg sysem expeeced a css he md-980s wh sgfca levels of bad loas. Ye o Koea bak faled a ha me. Bak of Koea Glbe ad Wlso 998 ad Jeo ad Mlle 2004b povde moe dealed fomao. 6 Fom 994 hough foeg baks opeaed Koea some fo he full sample peod ohes fo oly pas. The 60 baks clude 4 each fom he U.S. ad Japa 6 fom Face 4 each fom Caada ad 6

8 Foeg baks came o Koea dug he 970s ad 980s paly because hey eceved moe favoable eame cea aeas ha domesc baks. I he md-980s egulaoy chage o oly whled dow he pefeeal eame of foeg baks bu also educed baes ad escos o foeg bak acves ohe aeas. Thus he playg feld was bascally leveled bewee foeg ad domesc baks. The Asa facal css h he Koea ecoomy ad bakg sysem ea he ed of hs log pocess of deegulao ad pvazao. Alhough Koea expeeced elavely hgh ecoomc gowh ad low flao he ealy 990s some weakesses exsed he facal seco: low eaoal eseves ad poo goveme egulao ad supevso of he bakg sysem. The copoae seco oveexeded self wh oo much vesme ad boowg. Whe seveal chaebols e.g. Ka Habo Haa ad Samm we bakup ad ohe chaebols defauled o sydcaed loas foeg ledes eevaluaed he posos Koea. Foeg souces of fuds quckly deceased. egoal ad aowde commecal baks oveused sho-em foeg ledg as a souce of fuds. The lack of aspaecy of balace shees come saemes ad maageme pacces all led o a css of cofdece Koea suos. I sum he Asa facal css eeced a oadblock acoss he pah of deegulao ad pvazao. As facal codos bakg seco deeoaed he Koea goveme bega seachg fo poeal mege paes. Dd foeg bak opeaos pomoe sably o volaly dug hs css? Suppoes of ad deacos o foeg bak ey make seveal agumes e.g. Claesses Demgüç-Ku ad Huzga 200 Demgüç-Ku Lev ad M 998 Sgapoe 3 fom he U.K. ad 2 each fom Ausala Cha he Nehelads ad Swzelad ad each fom ohe coues. 7

9 Dages Goldbeg ad Key 2000 ad Lev 996. O he posve sde foeg baks povde a mpoa chael fo foeg capal flows o face a e expaso of domesc acves. Foeg baks ca also cease compeo domesc makes ha ca mpove he effcecy of domesc bak opeaos lowe he cos of povdg facal sevces educe ees aes chaged o loas ad cease he ees pad o deposs heeby smulag domesc savg ad vesme. Foeg baks ca also pomoe mpovemes goveme egulao ad supevso of he facal sysem by mpog busess pacces foged by moe sge home couy egulaos. O he egave sde foeg baks cease he volaly of domesc facal makes. The foeg capal chael povded by foeg baks o oly ecouages a flow of capal good mes bu also expedes a apd ouflow of foeg capal whe a facal css occus. I addo f foeg baks appea moe sable ha domesc suos hey may aac he bes domesc boowes hghe-pof ad lowe-sk boowes pug domesc baks he moe pecaous poso of ledg o less ced-wohy boowes. Also foeg baks ca oduce ufamla busess pacces ha domesc egulaos may fd dffcul o evaluae ad supevse. ahe ha mpovg he egulaoy o supevsoy pocess foeg baks ca ceae complex poblems fo he domesc goveme. Claesses Demgüç-Ku ad Huzga 200 oe ha foeg baks opeag developg coues geeally acheve hghe pofably ha domesc baks; 7 he oppose occus developed coues. They he offe seveal aoalzaos fo he dffeeces bewee he pofably of foeg baks 7 The Koea expeece maches ha obsevao ove he 994 o 2000 peod. See Table. 8

10 developed ad developg coues. Fs low e-ees mags developed coues may eflec pacpao wholesale ahe ha eal makes wh smalle e-ees mags. Secod he echcal advaages fo foeg baks developed coues may be oo small o cove fomaoal dsadvaages. Of couse hose wo explaaos of low e-ees mags may evese hemselves developg coues. Bege DeYoug Geay ad Udell 200 cosde wo aleave hypoheses ha ca expla dffeeces foeg ad domesc bak pefomace he home-feldad global-advaage hypoheses. The home-feld-advaage hypohess agues ha domesc baks geeally oupefom foeg baks because of fomaoal ad cos advaages. The global-advaage hypohess agues ha baks fom some coues possess suffce effcecy gas allowg hem o ovecome ay home-feld advaages accug o domesc baks. Vaous aalyss sugges ha foeg bak ledg played a uque ole he Asa facal css vs-à-vs ohe smla eves Cho ad Hog 200 Kamsky ad eha 200 ad Toell 200. Domesc baks suppled majo quaes of ced o domesc fms. Domesc baks also came o ely moe heavly o foeg bak ledg. Whe he css h he supply of foeg ledg evapoaed quckly cofog he domesc baks wh a lqudy css. Moeove some commeaos dc he al Ieaoal Moeay Fud IMF escue pogams as woseg he lqudy css by equg ghe ced adele ad Sachs 998 ad Sglz Nolad 2000 dffeeaes he Koea fom ohe Souheas Asa cses sce he Koea vesme boom occued he maufacug seco especally he chaebols ahe ha eal esae ad sce vesme gowh was fuded lagely by 9

11 sho-u capal flows. Tha s sho-em capal cools wee lbealzed whle he log-em cools wee o. 8 I sho he facal css caused some mpoa copoae boowes o defaul o he loas o baks. Tha egave shock was efoced ad compouded by he loss of foeg ledg o domesc baks. Impedg bak falues ecessaed he eveo by he ceal bak o asss fdg mege paes possbly foeg o o ake ove opeaos of he faled baks. The Koea goveme s eveo o bakg makes howeve dd o lm self o supevso ad egulao. The goveme played a pome ole allocag ced o poy duses as pa of s ecoomc developme saegy. Baks gaed polcy loas o favoed fms because he goveme deced hem o do so. I some cases he ced exeded possessed lle coeco o he facal vably of he udewe pojecs ad cobued o loa qualy poblems expeeced by Koea baks dug he facal css. Bah Capo ad Leve 2002 povde a eesg ws o he exg leaue. To w he pape a pa of a much lage eseach ageda usg a ew cosscouy daabase o bak egulao ad supevso fds ha bakg cses posvely coelae wh lmaos o foeg bak ey o domesc bakg makes. Thus meely educg such lmaos ad easg he ably of foeg baks o ee he domesc bakg make educes he cdece of bakg cses eve f foeg baks do o ee. I sum he fdg suggess ha poeal ey of foeg baks poves saluay o he sably of he domesc bakg make. 8 Nolad 2000 also agues ha he al IMF pogam exacebaed poblems by cofusg he Asa facal css wh he eale La Ameca css. The Asa css dffeed accodg o Nolad because he copoae expaso was loa o equy based. Thus he facal css ased ees aes ggeg a lqudy css. The IMF s pescpo o ghe ced woseed he lqudy css. 0

12 The moveme ece decades owad moe-ope facal makes ad he ceased acvy of foeg baks domesc facal makes suggess ha he popoes have cuely wo he day. The Asa facal css ases he ssue of he ole f ay of foeg baks ceag o coug he css. Ths pape exames he Koea expeece. 3. Ideal Dyamc Decomposo Ths seco befly oules he seps ecessay o geeae he deal dyamc decomposo. 9 The basc saegy volves decomposo usg peods ad - as he base yeas ad he combg he esulg decomposo o he deal decomposo by compug he smple aveage. The eu o equy a me s defed as e come dvded by equy as follows: NI E E E E NI E NI E NI whee E NI ad E E. Tha s equals e come dvded by equy held by bak a me ad equals s shae of dusy equy. The he chage eu o equy bewee wo peods equals he followg expesso:. 9 Moe deals he devaos appea he Appedx ad Jeo ad Mlle 2004a.

13 whee ad ae he umbe of baks ha exs a me - ad me especvely. Tha s whee equals he umbe of baks ha ee dug me ad equals he umbe of baks ha ex dug me -. Ad also whee equals he umbe of baks sayg a boh ad -. Fally we ge ha ad. ex ey ey ex say ex ey say say ey say ex Poposo The chage eu o equy ove wo peods decomposes o fou dffee effecs as follows: effec ex v ey effec eallocao effec wh effec ex ee say say whee E NI E NI ; ad E E E E. Devao: See Appedx. Poposo copoaes he dea of he ''Fshe Ideal Idex''. Two aleave mehods ca calculae he effecs of a chage eu o equy by each bak -- 2

14 weghed by las yea's o hs yea's equy shae. 0 The exsg leaue ypcally uses las yea's shae. Whe calculag he decomposo solae he ems fo he exs ad eas. elag hem o some bechmak add ad subac ehe he oveall eu o equy las yea o hs yea. The mulply by he sum of he shaes whch equals oe by defo. Fally beak he summao apa o allocae he exs ad ees as well as he baks ha ae sayg boh yeas. The exsg leaue decomposes he eallocao effec o wo compoes -- a em ha eflecs chages shaes bu elave o he fs yea's eu o equy ad a covaace em. Ths decomposo emeges fom dog he decomposo oly oe way. The deal decomposo defed Poposo does o clude he covaace em Jeo ad Mlle 2004a. I addo decomposos also exs fo ohe pofolo vaables such as eu o asses equy o asses loas o asses ad so o. 4. Applcao of Ideal Dyamc Decomposo Ou daa o baks Koea come fom Facal Supevsoy Sevces 200. Sxee aowde ad 0 egoal baks as well as 60 foeg baks ee ou daabase fo a leas oe yea he sample fom 994 hough I addo some bak eaces meges acqusos ad covesos occued ove he sample peod. The wh effec capues he pefomace of dvdual baks fom oe yea o he ex. The eallocao ey ad ex effecs povde a effecve way o measue he cosequeces of bak esucug. 0 Ey ad ex complcae maes. Whe compag umbes bewee wo cosecuve yeas exs do o exs he secod yea whle eas do o exs he fs yea. Glches ad egev 995 povde a excepo. 3

15 Table shows ha he aveage eu o equy fo all baks Koea exceeded zeo befoe 997. The chage eu o equy geeally suffeed egave chages ouchg boom 998 see Table 2. Moe ecely hough he chage eu o equy assumed posve values. The bgges effecs occued wh he damac decease fom 997 o 998 ad he ea evesal fom 998 o 999. Table also shows he dffeeces acoss dffee bak ypes foeg ad aowde ad egoal Koea baks. Foeg baks dd o expeece he same damac swgs he eu o equy dug he Asa css exhbg posve values ad eachg he maxmum 997. Esseally o coelao exs bewee aveage eu o equy fo foeg baks ad ay goupg of Koea baks aowde egoal o all Koea baks. Koea aowde baks howeve se he ed fo he all bak fdgs sce aowde baks domae he Koea bakg dusy. egoal Koea baks wee gealy affeced by he css. Moeove eve hough hey ecoveed somewha 999 hey expeeced a elapse The fomao Table suggess ha foeg baks beefed fom wo global-advaage effecs. Fs foeg baks exhbed a hghe aveage eu o equy ha Koea baks ehe aowde egoal o all Koea baks fo each ad evey yea ou sample. Secod foeg baks succumbed less o he shock of he Asa facal css ha dd domesc Koea baks. Table 2 povdes a addoal pece of fomao o foeg ad domesc bak pefomace. To w boh foeg baks ad Koea baks exhbed a subsaal decle aveage eu o equy bewee 997 ad 998 whee he foeg bak decle was lowes. The chage eu o equy fom 998 o 999 howeve shows ha Koea 4

16 baks oupefomed foeg baks ecoveg fom he shock of he Asa facal css eflecg lage pa he eveo of he Koea goveme espose o he Asa facal css. Table 3 shows ha Koea baks exed he dusy lagely 997 ad 998. Also he umbe of baks boh domesc ad foeg deceased sce 995 paly because of bakupces acqusos ad meges of Koea baks 997 ad 998 ad paly due o he moe feque ex of foeg baks sce 998. Table 4 epos he esuls of he decomposo aalyss. Fo all baks he wh effec domaes movemes he eu o equy excep fo fom 995 o 996 ad 998 o 999. Tha s he wh effec moves he same deco ad wh smla magude as he eu o equy wh a coelao of The eallocao-effec howeve domaes eves fom 995 o 996 ad 998 o 999 especally he lae. The ex effec fom 998 o 999 also acheved a oewohy level addg o oveall dusy pefomace. Tha s hose baks ha exed possessed o aveage a lowe eu o equy ha he aveage fo he dusy mpovg dusy pefomace. Moe useful fomao emeges whe we ecompued he decomposos by bak ype foeg ad aowde ad egoal Koea baks. The wh-effec clealy domaes movemes he eu o equy fo foeg baks wh a coelao of 0.99 whch cofoms o he fdgs of Jeo ad Mlle 2004a fo he U.S. bakg dusy. The eallocao effec s much smalle elave sze dcaes ha foeg baks pefe o ex fom he Koea make ahe ha o mpove he effcecy whe he busesses expeece ouble. Sx foeg baks wh lowe pofably eeed 997 ad 998 whle wo ewly eeed baks 999 ad 5

17 2000 caused posve ey effecs. The ex effec geeaes a posve cobuo o he chage eu o equy.e. he ex of less-pofable baks o aveage excep fom 998 o 999 mmedaely afe he Asa facal css. Fo all Koea baks he wh effec oce aga domaes movemes he eu o equy wh a coelao of The Asa facal css caused he wh effec o expeece lage egave oucomes fom 996 o 997 ad 997 o 998. The he eallocao effec domaed eves fom 998 o 999 whe oveall bak eu o equy ecoveed. Fally he wh effec domaed he fuhe mpoveme eu o equy fom 999 o Tha pae of eves fo all Koea baks moe closely mos he fdgs fo aowde baks ha fo egoal baks wh coelaos bewee he wh effec ad he chage eu o equy fo he egoal ad aowde baks of 0.99 ad 0.77 especvely. The posve eallocao effec obseved fom 998 o 999 fo aowde ad all Koea baks emeges fom 997 o 998 fo egoal baks. Tha s egoal baks bega esucug abou a yea ahead of aowde baks. A lage ex effec occus fom 997 o 998. The hee egoal baks ha ex 997 exhbed above aveage pefomaces whle he wo egoal baks ha ex 998 exhbed pooe pefomace o aveage. Fally he Koea egoal baks expeeced a damac evesal of foues fom 999 o 2000 whle he Koea aowde baks coued o mpove he pefomace. Because of he shee sze chages he Koea aowde baks domae he decomposo of movemes eu o equy o mae who else ees he goup. I ohe wods he paes obseved he decomposos of he chage he eu o 6

18 equy fo aowde baks mach moe closely he paes fo all Koea baks o fo all baks. The paes obseved fo he foeg ad Koea egoal baks exhbed dffeeces fom he aowde baks fdgs. I sum he wh effecs geeally domaed he movemes he eu o equy fo baks opeag he Koea. Tha s he chage of eu o equy geeally coelaes hghly wh he wh effec. I coas he Asa facal css pecpaed a lage esucug ha caused he eallocao effec o become much moe mpoa fom 998 o 999 fo aowde baks ad fom 997 o 998 fo egoal baks. The ecovey fom he Asa facal css bega eaes 999 ad coued 2000 excep fo he poo pefomace of he Koea egoal baks. Foeg baks also fell vcm o he Asa css alhough o as sgfcaly as domesc baks. The pefomace whch s lagely measued by he wh effec we dow afe 997. Foeg baks dd o face esucug as dd Koea domesc baks. Tha s foeg bak eallocao effecs afe he Asa css emaed elavely small whe compaed o hose of he Koea domesc baks. Tha las obsevao pobably eflecs he fac ha foeg baks Koea epese a small poo of bakg seco Koea as well as he cosoldaed opeaos of ha bak s pae. 5. Cocluso The pefomace of domesc ad foeg baks has egaged eseaches ece yeas. Should govemes ve o allow foeg baks o opeae wh domesc facal makes? Ca domesc baks compee wh foeg baks o domesc sol? Ou pape cosdes some of he ssues hs debae focusg o he eves Koea befoe dug ad afe he Asa facal css. 7

19 Foeg baks pefomed ufomly bee o aveage ha domesc Koea baks. The evdece sogly suggess ha foeg baks expeeced a global advaage ha ovepoweed ay home-feld advaage ejoyed by domesc baks. Tha global advaage by foeg baks efleced o oly bee pefomace o a yeaby-yea bass bu also bee esposes o he dffcules hus o he Koea ecoomy ad facal seco by he Asa facal css. The quck eveo of he Koea goveme howeve o epa he damage allowed he domesc Koea baks o ecove moe vgoously ha foeg baks ove he 998 o 999 peod. The deal dyamc decomposo eveals ha he wh effec geeally domaed movemes eu o equy. The Asa facal css dd cause a damac esucug of he Koea bakg dusy excludg he foeg baks. As aleady meoed he Koea goveme played he majo ole ha esucug aempg o peve he css fom woseg. 2 As such he eallocao effec of Koea baks ceased damacally dug he peod fom 997 o 999. Whe he Asa facal css h 997 he damac decease eu o equy Koea domesc baks boh aowde ad egoal eely efleced he wh effec. The bakg sysem s pefomace was buoyed fom 997 o 998 by he eallocao effec moe so fo he egoal ha he aowde baks as well as he exg of baks wh below aveage pefomace. Tha esucug pocess coued fom 998 o 999 wh he aowde baks pacpag moe sogly ha befoe. Fally he egoal baks expeeced a evesal of foues ad declg pefomace fom 999 o U.S. egulaos faced a facal css dug he savgs ad loa debacle. The U.S. goveme decded o solve ha css ad o sweep he ssues ude he ug. Japa o he ohe had has ye o addess ay seous way he ccal poblems ha faces s facal seco. Koea adoped he U.S. appoach. 8

20 Two fal ssues deseve dscusso. Fs why dd foeg baks oupefom Koea domesc baks? Oe explaao may povde he bulk of he aswe. Foeg baks ulke domesc Koea baks dd o eceve Koea goveme deco o offe bak ced o seleced favoed duses. I ha egad foeg baks may have held moe-dvesfed less-vuleable pofolos. 3 Aohe possbly less-plausble explaao exss howeve. Foeg baks sce hey ae much smalle ha Koea baks eve Koea egoal baks ca moe easly ad quckly adjus o chagg ccumsaces. Secod dd foeg-bak pacpao he Koea ecoomy affec domesc bak pefomace? Demgüç-Ku Lev ad M 998 fd ha geae pacpao by foeg baks educes he pobably of a bakg css mpoves he effcecy of domesc baks ad booss ecoomc gowh decly by mpovg domesc bak effcecy. Fuhe he effecs of foeg bak opeaos elae o he umbe of foeg baks ad o he sze of he opeaos. I Koea he umbe of foeg baks exceeded he umbe of domesc Koea baks each yea of he sample see Table 3 alhough foeg baks epese a small shae of he Koea bakg make. Oe ca cojecue ha he elave success of foeg bak opeaos Koea povded a mpoa demosao effec whch ecouaged he Koea goveme o esucue s ow bakg dusy. We leave ha cojecue fo fuue vesgao. 3 Befoe he Asa facal css mos foeg baks Koea opeaed pmaly as copoae bakes focusg o fee-geeaed come fom mulaoal compaes ad few Koea fms. Foeg baks dd o fose a sgfca exposue o Koea chaebols. The copoae-oeed Koea baks howeve dd ely o sgfca exposue o ced ledg o chaebols. The falue of seveal chaebols dug he Asa facal css damaged he facal healh of copoae-oeed Koea baks. eal-oeed domesc ad foeg baks wee less vuleable o he css. Jeo Mlle ad Nake 2004 povde moe dscusso of he dffee busess models fo baks Koea ad exame whehe foeg baks sablzed Koea facal makes. 9

21 EFEENCES: Baley M. N. Hule C. ad Campbell D. The Dsbuo of Poducvy. Bookgs Papes o Ecoomc Acvy: Mcoecoomcs Bak of Koea 998. Bak esucug Koea. Seoul: The Bak of Koea Bak of Koea 994. Facal Lbealzao ad Ieaoalzao Koea. Seoul: The Bak of Koea Bah J.. G. Capo J. ad. Leve Bak egulao ad Supevso: Wha Woks Bes. Naoal Bueau of Ecoomc eseach Wokg Pape No Bege A. N.. DeYoug H. Geay ad G. F. Udell 200. Globalzao of Facal Isuos: Evdece fom Coss-Bode Bakg Pefomace. I. E. La ad A. Saomeo Eds. Bookgs-Whao Papes of Facal Sevces 3. Cho D. ad K. Hog 200. Cuecy Css of Koea: Ieal Weakess o Exeal Iedepedece? I egoal ad Global Capal Flows: Macoecoomc Causes ad Cosequeces eds. T. Io ad A. O Kuege Eas Asa Sema o Ecoomcs Volume 0. Claesses S. A. Demgüç-Ku ad H. Huzga 200. How Does Foeg Ey Affec he Domesc Bakg Make? Joual of Bakg ad Face Dages Gead Lda Goldbeg ad Dael Key Foeg ad Domesc Bak Pacpao Emegg Makes: Lessos fom Mexco ad Agea. Ecoomc Polcy evew. Fedeal eseve Bak of New Yok. 6 Sepembe: Demgüç-Ku A. Lev. ad M H.-G.. Opeg o Foeg Baks: Issues of Sably Effcecy ad Gowh. I The Implcaos of Globalzao of Wold Facal Makes Cofeece Poceedgs The Bak of Koea Seoul 998. Facal Supevsoy Sevces Bak Maageme Sascs 200. Glbe. A. ad Wlso P. W. Effecs of Deegulao o he Poducvy of Koea Baks. Joual of Ecoomcs ad Busess Glches Z. ad egev H. Fm Poducvy Isael Idusy Joual of Ecoomecs

22 Halwage J. C. Measug ad Aalyzg Aggegae Flucuaos: The Impoace of Buldg fom Mcoecoomc Evdece. Fedeal eseve Bak of S. Lous evew 79 May/Jue Jeo Y. ad Mlle S. M. A Ideal Decomposo of Idusy Dyamcs: A Applcao o he Naowde ad Sae Level U.S. Bakg Idusy. Uvesy of Nevada Las Vegas Wokg Pape 2004a. Jeo Y. ad Mlle S. M. Pefomace of Domesc ad Foeg Baks: The Case of Koea ad he Asa Facal Css. Uvesy of Nevada Las Vegas Wokg Pape 2004b. Jeo Y. Mlle S. M. ad Nake P. A. Do Foeg Bak Opeaos Povde a Sablzg Ifluece Koea? Quaely evew of Ecoomcs ad Face pess Kamsky G. L. ad C. M. eha 200. Bak Ledg ad Coago: Evdece fom he Asa Css. I egoal ad Global Capal Flows: Macoecoomc Causes ad Cosequeces eds. T. Io ad A. O. Kuege Eas Asa Sema o Ecoomcs Volume 0. Lev. Foeg Baks Facal Developme ad Ecoomc Gowh. I C. E. Bafeld Ed. Ieaoal Facal Makes Ameca Eepse Isue Pess Washgo DC 996. McGuck. H. Esablshme Mcodaa fo Ecoomc eseach ad Polcy Aalyss: Lookg Beyod he Aggegaes. Joual of Busess ad Ecoomc Sascs 3 Jauay Nolad M Avodg he Apocalypse: The Fuue of he Two Koeas. Isue fo Ieaoal Ecoomcs Washgo DC. adele S. ad J. Sachs 998. The Ose of he Eas Asa Facal Css. Naoal Bueau of Ecoomc eseach Wokg Pape #6680. Scapea S. Hemmgs P. Tessel T. ad Woo J. The ole of Polcy ad Isuos fo Poducvy ad Fm Dyamcs: Evdece fom Mco ad Idusy Daa. Ogazao fo Ecoomc Coopeao ad Developme Wokg Pape Sglz J. E Globalzao ad Is Dscoes. Noo & Compay New Yok NY. Toell A 200. Ledg Booms ad Cuecy Cses: Empcal Lk. I egoal ad Global Capal Flows: Macoecoomc Causes ad Cosequeces eds. T. Io ad A. O Kuege Eas Asa Sema o Ecoomcs Volume 0. 2

23 Table : eu o Equy Aveage Yea All Baks 6.37% 4.66% 4.72% -8.7% % -5.34% -5.80% Foeg 8.26% 7.96% 0.70% 29.58% 9.38% 6.3% 2.5% Baks All Koea 6.09% 4.9% 3.80% -4.9% % -9.62% -9.47% Baks Koea 5.73% 5.63% 5.4% -4.78% % -2.25% % egoal Baks Koea 6.7% 3.9% 3.49% -4.09% % % -8.58% Naowde Baks Noe: The umbes paeheses equal he umbe of baks eeg he aveage eu o equy epoed. Table 2: Chage eu o Equy Aveage Yea All Baks -.7% 0.06% -2.89% % 23.42% 9.54% Foeg -0.30% 2.73% 8.88% % -3.07% 5.83% Baks All Koea -.90% -0.39% -7.99% % 32.86% 0.4% Baks Koea -0.0% -0.22% -20.9% % 85.03% -9.75% egoal Baks Koea -2.26% -0.4% -7.58% % 27.84% 2.8% Naowde Baks Noe: These umbes appea also Table 4 alog wh he decomposo. 22

24 Table 3: Numbe of Sayg Eeg ad Exg Baks Yea All Baks Say Ey 0 6 Ex Foeg Say Baks Ey Ex Koea Say Baks Ey Ex Koea Say egoal Ey Baks Ex Koea Say Naowde Ey Baks Ex Noe: Sayg baks exs boh yeas. Eeg baks exs he secod bu o he fs yea. Exg baks exs he fs bu o he secod yea. Fo example Koea saw oe bak ee ad 3 baks ex 996. See he ad colums ude he All-Baks caegoy fo ey ad ex. As aohe example Koea saw 6 baks ee ad 8 baks ex

25 Table 4: A Ideal Decomposo of Idusy Dyamcs Yea SUM All Baks Wh -.94% -0.2% -4.54% -38.0% 0.2%.76% -42.9% eallocao 0.0% 0.28%.28% 7.6% 6.04% -2.33% 22.98% Ey 0.2% 0.00% 0.37% 0.05% 0.03% 0.47%.04% Ex 0.00% 0.0% 0.00% 0.4% -7.24% 0.35% -6.73% -.7% 0.06% -2.89% % 23.42% 9.54% -2.6% Foeg Wh -0.50% 2.9% 20.36% -9.32% -2.88% 3.52% 3.37% Baks eallocao 0.20% 0.02% 0.% -0.3% -0.50% 0.7% 0.23% Ey 0.00% 0.00% -.88% -0.6% 0.0% 0.88% -.5% Ex 0.00% -0.52% -0.29% 0.4% -0.3% -0.72% -.43% -0.30% 2.73% 8.88% % -3.07% 5.83% 3.89% All Wh -2.4% -0.56% % -42.6% 0.23% 3.43% -5.20% Koea eallocao 0.07% 0.8%.05% 4.47% 23.92% -3.29% 26.4% Baks Ey 0.6% 0.00% 0.96% 0.00% 0.00% 0.00%.2% Ex 0.00% 0.00% 0.00% 0.6% -8.7% 0.00% -8.0% -.90% -0.39% -7.99% % 32.86% 0.4% -5.56% Koea Wh -0.% -0.39% % % 66.59% -2.62% % egoal eallocao 0.0% 0.7% 0.54% 22.7% 0.3%.88% 25.08% Baks Ey 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Ex 0.00% 0.00% 0.00% 5.7% -8.2% 0.00% -2.96% -0.0% -0.22% -20.9% % 85.03% -9.75% % Koea Wh -2.56% -0.60% -9.89% -35.6% -6.00% 5.86% -48.8% Naowde eallocao 0.09% 0.8%.8%.5% 26.05% -3.68% 25.34% Baks Ey 0.20% 0.00%.3% 0.00% 0.00% 0.00%.33% Ex 0.00% 0.00% 0.00% 0.39% -7.79% 0.00% -7.39% -2.26% -0.4% -7.58% % 27.84% 2.8% -4.74% Noe: The chage eu o equy equals ad also appeas Table 2. The wh effec measues he cease aveage eu o equy due o hghe eu o equy each bak. The eallocao effec measues he cease aveage eu o equy due o eallocao esucug of equy bewee baks. Ad he ey ad ex measue he cease aveage eu o equy due o ey ad ex of baks. emembe ha he ex effec ees wh a egave sg so ha a posve egave ex effec educes ceases oveall aveage eu o equy. 24

26 APPENDIX DEIVATION OF POPOSITION: The chage eu o equy ca be ewe as A ex say ey say ex say ey say Decomposo Addg he em he gh had sde of A he say say ex ey say say ex ey say say ex ey say say say say say say ex say ey say Noe ha ad whch mples ha ey say ad 2 A ex say Theefoe we have ha 25

27 3 A ex ey say say ex ey say say say ex ey say say say ex ex ey ey say say say say ey say ey say ex ey say say Decomposo 2 Addg he em he gh had sde of A he say say ex ey say say ex ey say say ex ey say say say say say say ex say ey say Wh A2 we have ha 26

28 4 A ex ey say say ex ey say say say ex ey say say say ex ex ey ey say say say say ey say ey say ex ey say say Decomposo 3 combg fs wo decomposos Add he decomposos Case ad Case 2 ogehe A3 ad A4. Thus Q E D ex ey say say ex ey say say ex ey say say ex ey say say 27