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date: 10 December 2018

Abstract and Keywords

This article begins with a review of what is known about the impact of diversification on the risk and return of US financial institutions. The second section examines potential explanations for why banks diversify at all. The third section reviews the empirical literature that investigates the impact of diversification on the risk and return of financial firms. The fourth section concludes with potential interpretations of the results and a discussion of implications for financial market participants. US banks have clearly become more diversified over the last two decades as regulatory barriers fell, financial innovation progressed, and opportunities to expand into new products lines and new geographic areas opened. This diversification, however, has not provided an obvious advantage to large firms during the ongoing financial crisis as real-estate-related problems spread over a range of products and geographies.

Keywords: US financial institutions, risk and return, financial market

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