Determinants of profit efficiency: evidence from Korean savings banks

This article shows the profit efficiency and its determinants in Korean savings banks in the period 2002--2008 using a three-step estimation procedure: profit efficiency, computed in the second step after the first step Generalized Method of Moments (GMM) estimation, is regressed on the environmental variables in the third step. We found that industry-average profit efficiency dropped in 2004--2005 and quickly rebound in the subsequent years. We also found that unit banks and small banks are more efficient than affiliated banks and large banks. This article then analyses determinants of profit efficiency and presents three findings: (1) interest rate is the most important factor, with a 1% point increase in interest rate leading to a 20% point increase in profit efficiency; (2) profit efficiency declines as bank assets increase, implying that the expansionary strategy is not profit-enhancing unless current technology for financial intermediation changes; and (3) an increase in noncollateral loans lowers profit efficiency, implying that a policy drive for an increase in noncollateral loans requires <italic>a priori</italic> appropriate credit rating system and transparent accounting practices.