Korean commercial banks are now beginning to show some signs of progress following the massive restructuring efforts as evident by the recent addition of 40 trillion Won over and above the 100 trillion Won of public money already spent. Problematic banks such as the Hanvit Bank are currently undergoing restructuring and have made a new start under the umbrella of a bank holding company. The relatively healthier banks such as Kookmin Bank and Housing and Commercial Bank have also announced a merger schedule with further steps to establish the next succeeding arrangement. In general, restructuring among the remaining banks is currently under regular discussion.

There have been only a few empirical studies, many of which touch on a narrow range of issues, which investigate into the efficiency of Korean commercial banks. Nevertheless, these have not been used to suggest plausible directions to restructuring the banking sector, particularly emphasizing, in general, ways to compete against international banks and to improve international competitiveness. However, without a comprehensive analysis of the existence of economies of scale, the mergers and acquisition activities among banks as a viable form of restructuring to be promoted by the government cannot be justified.

In this paper, we measure the production efficiencies of Korean commercial banks and compare them to each other. The DEA (Data Envelopment Analysis) method is applied in our analysis. We find that although it may be more difficult to find a merging partner, M&A among banks with similar production technologies would push the economy closer to the socially attainable production frontier. The production efficiency of Korean banks will be improved for those banks wishing to merge, as well as other banks, if there is a reduction in bank personnel and the number of branches, and if there is further disposal of bank assets. In this paper, we suggest the size of reduction of personnel and bank branches as well as the disposal of assets for each bank by looking into various scenarios.  We conclude that without the necessary reduction and belt-tightening, the current M&As among Korean commercial banks is bound to result in continued inefficiency.

Putting 40 trillion won in addition to the 100 trillion won of public money, the additional restructuring in the banking sector is making some progress. Problem banks including Hanvit Bank are restructured and made a new start under the umbrella of the bank holding company. Healthy banks, such as Kookmin Bank and Housing and Commercial Bank, also announced the merger schedule and made further steps into the next succeeding arrangement. The restructuring among remaining banks is still under discussion.

Not many researches have been discussed empirically about the efficiency of the Korean commercial banks and suggested the desirable direction of the restructuring in banking sector to compete against the foremost international banks and to improve its international competitiveness. Without proving the existence of the economy of scale, however, it can not be justified the Korean government policy to encourage the mergers and acquisitions among banks as a way of restructuring.

In this paper, we measure the production efficiencies of the Korean commercial banks and compare them each other, using the DEA (Data Envelopment Analysis) method. Analysis shows that the mergers and acquisitions among the banks which have similar production techniques can make the economy close further to the socially attainable production frontier, although it may not be easy to find the partners to merge. After measuring the production efficiency of Korean banks, we find that further reduction in bank personnel and branches and further disposal of bank assets are definitely needed to improve the efficiency of the banks to be merged as well as the remaining banks. By scenario, we suggest the size of the reduction in personnel and branches as well as disposal of assets for each bank. Without the appropriate reduction, the currently progressing merger and acquisition in Korean banks will bring out increasing the inefficiency of the banks.