Diversification at Financial Institutions and Systemic Crises

W.B. Wagner

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Abstract

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.
Original languageEnglish
Place of PublicationTilburg
PublisherMacroeconomics
Number of pages40
Volume2006-71
Publication statusPublished - 2006

Publication series

NameCentER Discussion Paper
Volume2006-71

Keywords

  • diversification
  • financial consolidation
  • conglomeration
  • securitization
  • system risk

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