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Journal Article

Bank diversification: laws and fallacies of large numbers


Abstract: Conventional wisdom on bank diversification confuses risk with failure. This article clarifies the distinction and shows how increasing bank size may increase bank risk, even though it lessens the probability of failure and lowers the expected loss. The key result is an application of Samuelson's \"fallacy of large numbers.\"

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Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Economic Review

Publication Date: 1998

Volume: 34

Issue: Q II

Pages: 2-9