Diversification Can Control Probability of Default or Risk, but Not Both

One of the controversies diversification is that it may not be beneficial to banks, as tends increase systemic risk. Recent theoretical and empirical work have addressed this problem. We argue, from a perspective, controversy ultimately depends on how risk assessed or measured. In particular, we observe when one talks about random losses (risk) there are two intertwined approaches. On hand, can fix loss level ask with what probability does occur. other, confidence (or loss) ask, for example, smallest probability. banking system, crisis occurs all banks default simultaneously. Using Wagner, where he proposed simple model system in which increases diversification, extend his analysis show if allows short positions; then decreases, but risk, measured by value at (a non-coherent measure) increases. This brings up an interesting methodological question management: Should consider given (acceptable) or, should minimum acceptable probability? that, within Wagner’s depending asked, different answer obtained. This, turn, lead us discuss some implications these results managers regulators.