Does Uniqueness in Banking Matter?
50 Pages Posted: 8 Aug 2017 Last revised: 12 Jun 2018
Date Written: June 11, 2018
Banking activities differ in their uniqueness. Common activities are performed by most banks, unique activities by few banks. We investigate whether and how the uniqueness of banking activities affects the performance and systemic risk of U.S. banks. We find that banks performing more unique activities exhibit higher profitability and lower risk, controlling for size, diversification, and other key characteristics. We show that this positive performance impact of activity uniqueness is due to product differentiation but not productivity. We further find that banks’ sensitivity to systemic risk displays an inversely U-shaped relation with activity uniqueness. This result holds for different measures of systemic risk measures and in different model specifications. We interpret the impact of uniqueness in analogy to recent theories showing that systemic diversity promotes financial stability. Our study highlights the role of uniqueness in banking and has important implications for policy makers and banking regulators.
Keywords: Banks, Performance, Systemic Risk, Diversification, Diversity
JEL Classification: G20, G21
Suggested Citation: Suggested Citation