Financial Innovation and Bank Performance: The Moderating Role of Risk Management, Management Efficiency, and Market Power in the U.S. Banking Sector

This dissertation examines the relationship between financial innovation and bank financial performance, with a focus on how strategic moderators, namely risk management capabilities, management efficiency, and institutional market power, shape this dynamic. The US banking sector, the global leader in financial innovation, serves as the empirical setting for this study, offering critical insights into how banks can leverage innovation to enhance profitability amid evolving market conditions. This study proposes and tests a contingency-based framework, positing that the impact of financial innovation on bank performance is contingent upon internal capabilities and market structures. Drawing on a longitudinal panel dataset of the largest publicly listed U.S. bank holding companies from 2012 to 2023, the study constructs a multidimensional financial innovation index based on patent activity, growth in intangible assets, and off-balance sheet activities. This research contributes to the literature by advancing both contingency theory and the resource-based view, demonstrating that the benefits of financial innovation are not uniform but rather depend on the internal alignment of an organization's capabilities. The empirical results reveal that financial innovation has a positive effect on accounting-based performance metrics, although its impact on market-based valuation metrics remains inconclusive. Crucially, the findings demonstrate that robust risk management capabilities significantly enhance the performance gains from innovation, underscoring the strategic value of integrating risk governance into innovation processes. The study offers actionable implications for banking executives and policymakers, advocating for a more strategic and integrated approach to innovation management, specifically one that aligns innovation initiatives with dynamic risk management and institutional agility. These findings provide a foundation for more targeted regulatory oversight and inform future research on how banks can sustain innovation-led performance in an increasingly complex and competitive financial landscape.