Profitability of Korean banks: Test of market structure versus efficient structure

This paper identifies the major determinants of profitability in the Korean banking sector for the period of 1992–2002 by testing the market structure hypothesis against the efficient structure hypothesis. The unique feature of this paper is the estimation of technical inefficiency by the directional distance function and the use of this estimate in explaining bank performance. The results indicate that bank efficiency has a significant effect on bank profitability and support the efficient structure hypothesis. We also find that the major determinants of bank profitability in Korea changed between pre- and post-Asian financial crisis periods.