Conventional wisdom in banking argues that diversification tends to reduce bank risk and improve performance, but the recent financial crisis suggests that aggressive diversification strategies may have resulted in increased risk taking and poor performance. This paper addresses this important...

"We use bank stock returns to develop an ex-ante measure of the distortion created by the implicit collective guarantee extended to large U.S. financial institutions. The average return on a stock portfolio that goes long in the largest U.S. commercial banks and short in the smallest banks is...