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The conventional wisdom on bank diversification confuses risk with failure. This paper clarifies that 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." clevelandfed.org/research/workpaper/index.cfm ' Compare Haubrich (1990) with Even small banks may diversify, however, by selling loans or participating in mortgage pools or other forms of securitization.
Joseph G. Haubrich (Thu,) studied this question.