International Comparison of Japanese and Korean Banking Efficiency

Abstract

This study investigates the pattern of changes in efficiency

and productivity of the banking sectors at the firm level for the

period of 1991-2005 using output distance function and

applying the one-stage stochastic frontier approach. This study

pools Japanese and Korean bank dataset to effectively compare

the pattern of change between Japanese and Korean banking

efficiency. Our results indicate that estimates of technical

progress, technical efficiency, and total factor productivity (TFP)

depend on the viewpoint about the true function of bank:

intermediation approach, value-added approach, or operating

approach. While intermediation approach results imply that the

productivity has overall declined over the sample period for the

both country banks, operating approach results are mixed for

the two countries. Value-added approach indicates positive TFP

growth for the both countries. In most cases, the levels of

technical efficiency were further behind the technological frontier

for the Korean banks than for the Japanese banks.