Determinants of Net Interest Margin in Korean Banking Industry (in Korean)

Chang-Gyun Park () and Taehoon Youn ()
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Chang-Gyun Park: Chung-Ang University
Taehoon Youn: Korea Development Institute

Economic Analysis (Quarterly), 2009, vol. 15, issue 2, 137-166

Abstract: We investigates the determinants of net interest margin in Korean banking industry. Three important findings are reported. First, several variables confirmed as important factors determining net interest margin by previous researches are also found to play significant roles in net interest margin in Korea. Those variables include risk preference of bank managers, average operating cost, and strategic choice of operational focus. Unlike other researches, our analysis fails to find a statistically significant link between net interest margin and individual bank's market power measured by its asset share. We also fail to find a supporting evidence for the hypothesis that banks with high credit risk in loan portfolios tend to set higher net interest margin to cope with expected loss. Second, banks owned by foreign capital shows significant difference in setting net interest margin from banks under Korean management. We conjecture that foreign investors that acquired ailing Korean banks after foreign exchange crisis in 1997 in most cases have had technological advantages over other banks. Those advantages are often considered to be a strong ground for higher net interest margin. Third, it seems that recent increase in revenue from supplying non-traditional services such as sales of insurance and mutual fund products has changed banks' decision on net interest margin that is still the most important revenue source. We suspect that one could find stronger links between net interest margin and foreign ownership or non-interest income considering the short time span we examined in this paper.

Keywords: Net interest margin; Market power; foreign banks (search for similar items in EconPapers)
JEL-codes: G21 (search for similar items in EconPapers)
Date: 2009
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