We show that the diversification of risks at financial institutions has unwelcome effects by increasing the likelihood of systems crises.As a result, complete diversification is not warranted adn the optimal degree of diversification is arbitrarily low.We also identify externalities that cause financial institutions to diversify beyond diversification may thus have reduced welfare.
|Place of Publication||Tilburg|
|Number of pages||40|
|Publication status||Published - 2006|
|Name||CentER Discussion Paper|
- financial consolidation
- system risk