Abstract for: Portfolio Implications of Combining Banking with Commerce In the Korean Context: A study based on System Dynamics Approach
The policy of separating commerce from banking has been strictly enforced in South Korea. However, with the passage of the Capital Market Integration Law of 2007 that allows banks to engage in other non-financial activities, the debate now shifted to the final barriers separating banking and commerce. The goal of this paper is two-foiled. First, we examine the possible impact of mixing banking and commerce on earnings and risk diversification. Using a portfolio approach, this paper investigates the risk-return characteristics of the industry mix to analyze the potential benefits from banking diversification into commercial sectors. Second, we also test implications of our results to understand how the specific industry mix leads to the diversification effects using a System Dynamics (SD) model. For this purpose, key variables identified are incorporated into the SD model to simulate feedback structure of the industry mix. The result indicates at least some commercial sectors generated the synergic relationship with banking enterprises. It suggests that increasing returns could have been accomplished with minimum risk by combining banks with either one of manufacturing, transportation, or information technology industries. A further analysis of the particular industry mix using the SD will provide ways of explaining why some commercial industries produce the earning diversification effects.