Skip to:
  1. Main navigation
  2. Main content
  3. Footer
Working Paper

Bank Diversification: Laws and Fallacies of Large Numbers

Download pdf
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."
12.01.1994ISSN 2573-7953 WP 94-17DOI 10.26509/frbc-wp-199417

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Haubrich, Joseph G. 1994. “Bank Diversification: Laws and Fallacies of Large Numbers.” Federal Reserve Bank of Cleveland, Working Paper No. 94-17. https://doi.org/10.26509/frbc-wp-199417