Changes in Financial Environment and the Stability of Korean Banks (in Korean)

These days, changes in the financial environment tend to increase the possibility of financial crisis. This paper analyses factors affecting individual banks' asset soundness, profitability, capital adequacy and liquidity in Korea, using Korean banks' annual panel data from 1999 to 2004. Korean banks' financial data show that herd behavior among Korean banks may have increased. It would thus be desirable for the policy authority to keep a more careful watch over banks' behavior. The results of SUR estimations show bank stability to have been negatively affected by increases in asset size and in the proportion of retail business conducted, but positively affected by business diversification, governance transparency and greater length of maturity of deposits. The effects on banks' stability of an increase in the overnight call rate seem ambiguous, as it has a negative impact on bank profitability, a positive impact on bank liquidity, and no significant effects on either the capital adequacy or asset soundness of banks. The estimation results also imply that as a bank becomes larger in asset size, less transparent in governance structure, and more diversified in its business lines, the bank's stability tends to deteriorate more severely when the overnight call rate rises.