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Diversification at financial institutions and systemic crises

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Author Info
Wagner, Wolf (Tilburg University, Center for Economic Research)

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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.

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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 71.

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Date of creation: 2006
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Handle: RePEc:dgr:kubcen:200671

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Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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  12. Wagner, Wolf, 2006. "The broadening of activities in the financial system : implications for financial stability and regulation," Discussion Paper 72, Tilburg University, Center for Economic Research. [Downloadable!]
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  15. Goldstein, Itay & Pauzner, Ady, 2004. "Contagion of self-fulfilling financial crises due to diversification of investment portfolios," Journal of Economic Theory, Elsevier, vol. 119(1), pages 151-183, November. [Downloadable!] (restricted)
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  1. Wagner, Wolf, 2006. "The broadening of activities in the financial system : implications for financial stability and regulation," Discussion Paper 72, Tilburg University, Center for Economic Research. [Downloadable!]
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