Does uniqueness matter for community banks?

The uniqueness of financial institutions serves as a useful proxy for financial fragility in local financial markets. Our paper investigates how unique community banks are and how market concentration affects the decision of community banks to provide unique financial services relative to their local peers. We find community banks provide relatively homogeneous services compared to their local counterparts. We employ bank and year fixed effects OLS regressions, as well as spatial econometric modelling and find that less concentrated markets encourage banks to seek strategies that maximize their profitability. Given that one of the reasons banks strive for uniqueness is to attract more customers and funding, we investigate how the availability of liquidity in financial markets impacts the relationship between these variables using the expansionary nontraditional monetary policy responses during the Great Recession as an exogenous shock to the availability of liquidity. We show that the profitability benefits of uniqueness are pronounced when liquidity is scarce but associated with lower bank returns when liquidity is relatively abundant.