Profitability of the Korean Banking Sector: Panel Evidence on Bank-Specific and Macroeconomic Determinants

Abstract

The paper analyzes the profitability of banks in Korea, while controlling for a wide_x000D_ array of bank specific and macroeconomic determinants. We find that Korean banks_x000D_ with lower liquidity levels tend to exhibit higher profitability. Furthermore, higher_x000D_ diversification regarding banks’ income sources towards derivative instruments and other fee-based activities shows a positive effect. The impacts of credit risk and overhead costs are always negative whether we control for the macroeconomic and financial conditions or not. Business cycle effects, particularly inflation, display a_x000D_ substantial pro-cyclical impact on bank profitability. The industry concentration of_x000D_ the national banking system positively and significantly affects bank performance._x000D_ The impact of the Asian financial crisis is negative, while Korean banks have been_x000D_ relatively more profitable during the pre-crisis compared to the post-crisis period.