Authors: Se-Jik Kim(Seoul National University), Seungki Hong(Columbia University)

Abstract

This paper aims to evaluate the core ability of Korean banks to distinguish more productive firms from less productive ones and provide loans selectively to the former. To this end, we calculate the value-added of Korean banks from the distribution side, and then assess total factor productivity (TFP) of the banks using the financial statement data for the period 1991-2013.

We find that the productivity of the Korean baking sector has not far grown from the level of the early 1990s. The banking sector productivity, which plummeted during the 1997 Korean financial crisis, rebounded in the mid-2000s but retreated again to its level of 1991 in recent years. We also discover that major declines in the Korean banking sector productivity can be largely attributed to tremendous losses from huge bad loans. These findings suggest that Korean banks may not have fully developed their capacity to select high-productivity firms and reduce bad loans for the last two decades.