Does Uniqueness in Banking Matter?

Banking activities differ in their uniqueness. Common activities are performed by all banks but unique activities by few banks. We find that banks performing more unique activities exhibit higher profitability and lower risk, controlling for bank size, diversification, and other key characteristics. We document that the mechanism behind this effect is product differentiation. Furthermore, we find that banks’ sensitivity to systemic risk displays an inversely U-shaped relation with activity uniqueness. Activity uniqueness in pre-crisis times has a positive impact on bank performance during the 2007-09 financial crisis and banks with intermediate pre-crisis activity uniqueness show the highest bailout probability during the crisis. We interpret the evidence on uniqueness in analogy to recent theories showing that systemic diversity promotes financial stability