Asian Review of Financial Research

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Economies of Scale and Scope Analysis in Korea's Banking Industry : A Spline Cost Function Approach ×
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Asian Review of Financial Research Vol.19 No.1 pp.119-154
Economies of Scale and Scope Analysis in Korea's Banking Industry : A Spline Cost Function Approach
Chan Pyo Kook1†
1 서강대학교 경영학부
Gwang Heon Hong1†
1 서강대학교 경영학부
Young Sik Jeong1†
1 삼성경제연구소
Key Words : 규모의 경제; 범위의 경제; 스플라인 함수(spline function); 은행산업

Abstract

This paper examines the economies of scale and scope in Korea's banking industry by applying a spline cost function approach with other widely-used cost functions, such as the translog and Fourier cost functions. One advantage of the spline function technique is that it overcomes the limitations of the translog function. It also has ability to better identify a variety of trends with smaller parameters than the Fourier function even when the sample size is small.The results, based on the spline cost function, indicate that there exists an economy of scale in Korea's banking industry. Regional banks have a relatively greater economy of scale than nationwide banks. The economies of scale exist in the banking industry across time periods:pre-financial crisis period of 1987~1997, between 1998 to 2000 when restructuring in the banking industry was earnestly promoted, and the final stage of restructuring in 2001~2004. However, our study does not show significant evidence of existence of scope economies, in that two different approaches do not produce the same conclusion. That is, the classical measure of scope economies finds no economies of scope for both nationwide and regional banks, whereas another measure of scope economies, called expansion path subadditivity, indicates there exists an economy of scope for both nationwide and regional banks. The economies of scope are found prior to the financial crisis in 1997 with the results differing based on the two measures. However, our study finds no economies of scope in the times following the crisis. 攀* Sogang University, College of Business Administration
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