The Innovation Tax: Generative AI Adoption, Productivity Paradox, and Systemic Risk in the U.S. Banking Sector
Tatsuru Kikuchi
TL;DR
This paper investigates Generative AI adoption in the U.S. banking sector by linking SEC 10-Q disclosures with Federal Reserve data for 809 institutions over 2018–2025, and employs Dynamic Spatial Durbin Models (DSDM) to quantify network spillovers and Synthetic Difference-in-Differences (SDID) around the 2023 ChatGPT shock to identify causal effects. The analysis uncovers a Productivity Paradox: AI adopters show higher cross-sectional productivity ($\beta > 0$) but adoption induces a short-run productivity decline—an implementation tax—with a ROE drop of about $428$ basis points, particularly severe for smaller banks; simultaneously, there are positive spillovers, especially among large banks, signaling strong algorithmic coupling. The results imply substantial network-driven productivity gains but raise systemic risk concerns from synchronized AI-driven decision-making, which could transmit correlated shocks across the banking network during stress. Policy implications include revisiting macroprudential testing, promoting AI vendor diversification, and considering institutional mechanisms to mitigate aggregated AI-driven risk while preserving diffusion benefits.
Abstract
This paper evaluates the causal impact of Generative Artificial Intelligence (GenAI) adoption on productivity and systemic risk in the U.S. banking sector. Using a novel dataset linking SEC 10-Q filings to Federal Reserve regulatory data for 809 financial institutions over 2018--2025, we employ two complementary identification strategies: Dynamic Spatial Durbin Models (DSDM) to capture network spillovers and Synthetic Difference-in-Differences (SDID) for causal inference using the November 2022 ChatGPT release as an exogenous shock. Our findings reveal a striking ``Productivity Paradox'': while DSDM estimates show that AI-adopting banks are high performers ($β> 0$), the causal SDID analysis documents a significant ``Implementation Tax'' -- adopting banks experience a 428-basis-point decline in ROE as they absorb GenAI integration costs. This tax falls disproportionately on smaller institutions, with bottom-quartile banks suffering a 517-basis-point ROE decline compared to 129 basis points for larger banks, suggesting that economies of scale provide significant advantages in AI implementation. Most critically, our DSDM analysis reveals significant positive spillovers ($θ= 0.161$ for ROA, $p < 0.01$; $θ= 0.679$ for ROE, $p < 0.05$), with spillovers among large banks reaching $θ= 3.13$ for ROE, indicating that the U.S. banking system is becoming ``algorithmically coupled.'' This synchronization of AI-driven decision-making creates a new channel for systemic contagion: a technical failure in widely-adopted AI models could trigger correlated shocks across the entire financial network.