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FinanceandEconomicsDiscussionSeries FederalReserveBoard,Washington,D.C.ISSN1936-2854(Print) ISSN2767-3898(Online) TrademarksinBanking RyuichiroIzumi,AntonisKotidis,PaulE.Soto2024-044 Pleasecitethispaperas: Izumi,Ryuichiro,AntonisKotidis,andPaulE.Soto(2024).“TrademarksinBanking,”FinanceandEconomicsDiscussionSeries2024-044.Washington:BoardofGovernorsoftheFederalReserveSystem,https://doi.org/10.17016/FEDS.2024.044. NOTE:StaffworkingpapersintheFinanceandEconomicsDiscussionSeries(FEDS)arepreliminarymaterialscirculatedtostimulatediscussionandcriticalcomment.TheanalysisandconclusionssetfortharethoseoftheauthorsanddonotindicateconcurrencebyothermembersoftheresearchstaffortheBoardofGovernors.ReferencesinpublicationstotheFinanceandEconomicsDiscussionSeries(otherthanacknowledgement)shouldbeclearedwiththeauthor(s)toprotectthetentativecharacterofthesepapers. TrademarksinBanking∗ RyuichiroIzumiAntonisKotidisPaulE.SotoMay23,2024 Abstract OneinfivebanksintheUnitedStatesshareasimilarname.Thiscanincreasethelikelihoodofconfusionamongcustomersintheeventofanidiosyncraticshocktoasimilarlynamedbank.Wefindthatbanksthatsharetheirnamewithafailedbankexperienceahalfpercentdropintransactiondepositsrelativetobankswithsimilarcharacteristicsbutdifferentname.Thiseffectdoublesforfailuresthatarecoveredinmedia.Werationalizeourfindingsviaamodeloffinancialcontagionwithoutfundamentallinkages.Ourmodelexplainsthatwhendistinguishingbanksismorecostlyduetosimilartrademarks,depositorsaremorelikelytoconfusetheirbanks’conditionresultinginfinancialcontagion. Keywords:Trademarks,Banking,BankRuns,BankFailures JELClassifications:G21;G14;G30 ∗IzumiisatWesleyanUniversity.KotidisandSotoareattheFederalReserveBoard.WethankTomazCajner, ToddKeister,AndreasLehnertandSkandervandenHeuvelforhelpfulcomments.TheanalysisandconclusionssetforthherearethoseoftheauthorsanddonotindicateconcurrencebyothermembersoftheresearchstaffortheBoardofGovernors. 1Introduction Atrademarkisasign-logo,soundorcolor-usedbyafirmtoidentifyaproductorservice.Unlikeapatent,whichisapropertyinterestheldbytheproprietor,trademarkscreatedistinctiveness.Theyconveyinformationaboutthequalityofaproductorservice,evenwhenqualityisnotobservable.Assuch,theyhelpresolveaninformationasymmetryproblem(e.g.,Akerlof,1970).Duetotheirabilitytoconveyinformation,thelawprotectstheownersoftrademarksfromtheuseofsimilarmarks.Consumersmayalsobenefitbecauseownersmaybeincentivizedtodeliverahigherlevelofqualityconsistentwiththeoriesoftrademarksastradeableassets(e.g.,Shapiro,1982,LandesandPosner,1987,AghionandHowitt,1992,Tirole,1996). Afirm’snameisthemostimportanttrademark(e.g.,Tadelis,1999).Despiteextensivelegalprotections,itisnotuncommonforfirmstousesimilarlysoundingnames.Theuseofsimilarlysoundingnames,however,canincreasethelikelihoodofconfusionamongcustomersifasimilarlynamedfirmexperiencesstress.Thisissueisprobablymoreacuteinthebankingindustry,wherespilloverstothesystemasawholearemorelikelyduetobanks’roleasliquidityproviders(e.g.,Kashyap,Rajan,andStein,2002). Severalcasesofrunsonbanksthathavesimilarlysoundingnameswithbanksexperiencingstressprovideausefulillustration.Forexample,followingtherescueannouncementoftheSanFrancisco-basedFirstRepublicBankonMarch17,2023,thestockofPennsylvania-basedRepublicFirstBankcorpplungedbynearly30%.ThismarkedRepublicFirst’sworstsingle-dayperformancesince1994despiteassurancesbythepresidentandCEOofthebankthat“amideverythinggoingon,RepublicBankwouldliketomakeveryclear:weareRepublicBank,Inc.(FRBK-Red/BlueLogo);weareNOTFirstRepublicBank(FRC-GreenLogo)”.1Otherbanks–SignatureBankof ArkansasandSignatureBankChicago–releasedsimilarstatementsafterSignatureBankNew YorkshowedthefirstsignsofstressinMarch2023.2OnJuly25,2008,followingtheclosureoftheFirstNationalBankofReno,Nevada,andtheFirstHeritageBankofNewportBeach,California,bytheOfficeoftheComptrolleroftheCurrency(OCC),thepresidentandCEOofHeritageBankofReno,Nevada,spentdaysassuringcustomerswhosawthenameHeritageinthenewsthathisbankwasfinanciallysound.3 1BankingDive,“RepublicFirstBankCEOtocustomers,investors:WearenotFirstRepublic”. 2SeeAppendixA. 3RenoGazette,“Bankreopenswithnewname”,29,July2008. TheseepisodesarebynomeansaU.S.orrecentphenomenon.OnSeptember4,2014,inIndia,followingthenewscoveragebyaBengalinewspaperthattheJalpaiguriCooperativeBankLimiteddidnothavetherequiredRBIlicencetobeanactivebank,depositorsbecameconfusedwiththenameandturnedupattheJalpaiguriCentralCooperativeBankbrancheswantingtowithdrawtheirmoney.4InOctober1934,depositorsranontheAmoybranchoftheNationalIndustrialBank ofChina.Thereasonwasarumourthatthebank’sheadofficeinShanghaiwasclosedandthebank hadgoneoutofbusiness.Thetruth,however,wasthatasimilarlysoundingbankinShanghaihadclosedontheexactsameday.5InSeptember1985,asconcernsmountedoverthehealthofsmallCanadianbanks,arundevelopedattheContinentalBankofCanada.Accordingtoitspresident,“thebankwasalsohurtbystatementsinthemediaconfusingitandatroubledtrustcompanywithasimilarname”,eventuallyresultinginasupportpackagefromagroupoffinancialinstitutionsandt