Does bond market development enhance the banking sector’s efficiency in resource allocation? Industry-level evidence from Korea

Donghyun Park, Kwanho Shin and Shu Tian

The North American Journal of Economics and Finance, 2021, vol. 57, issue C

Abstract: Korea’s financial system used to be bank-based, with banks playing the leading role in financing corporations. As highlighted by Park et al. (2019), however, bond markets have developed rapidly in Korea and other Asian countries. The corporate bond market competes with banks as a source of finance for large borrowers. As such, bond markets may affect banking sector operation, a process known as disintermediation. In this paper, we examine whether bond market development improves the efficiency of resource allocation in Korean bank lending. We propose two channels through which bond market development affects the efficiency of bank lending. Since the two channels have opposing effects on the efficiency of banking, the issue must be settled by empirical analysis. We find that bank loans are much less efficient than bond financing in allocating resources across industries. Furthermore, banks are particularly inefficient in resource allocation in industries that rely more on bond financing. This suggests that competition from bond financing does not improve allocative efficiency of bank loans.

Keywords: Bank loans; Bonds; Resource allocation; Efficiency; Competition; Financial disintermediation (search for similar items in EconPapers)
JEL-codes: D61 D81 E22 E44 G21 G31 O1 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:57:y:2021:i:c:s1062940821000371

DOI: 10.1016/j.najef.2021.101402

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