One of the controversies of diversification is that it may not be beneficial to banks, as it tends to increase systemic risk. Recent theoretical and empirical work have addressed this problem. We argue, from a theoretical perspective, that this controversy ultimately depends on how risk is...

Diversification practices by banks affect their own risk of failing and the risk of the banking system as a whole (systemic risk). A seminal theoretical work has shown that linear diversification can reduce the risk of a bank failing, but at the cost of increasing systemic risk. Later, a...