Bank diversification: laws and fallacies of large numbers

Joseph Haubrich

Economic Review, 1998, vol. 34, issue Q II, 2-9

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.\"

Date: 1998
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Working Paper: Bank diversification: laws and fallacies of large numbers (1994)
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