International Comparison of Japanese and Korean Banking Efficiency

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.