Foreign and Domestic Bank Performances: An Ideal Decomposition of Industry Dynamics

The aggregate performance of the banking industry depends on the underlying micro-level dynamics within that industry -- adjustments within banks, reallocations between banks, entries of new banks, and exits of existing banks. Jeon and Miller (2002a) extend Bailey, Hulten, and Campbell (1992) and Haltiwanger (1997) to develop a generalized ideal dynamic decomposition. This paper illustrates the ideal dynamic decomposition with return on equity of foreign and domestic Korean commercial banks from 1994 to 2000. The overall performance of Korean banks largely reflects individual bank efficiencies, except immediately after the Asian financial crisis where restructuring played a more important role on average bank performance. Foreign bank performance, however, largely reflected individual bank efficiencies, even immediately after the Asian financial crisis.