A long-standing idea in finance is that banks can use diversification to reduce their overall risk. By holding a range of investments, individual risks will balance each other out, improving the bank’s stability. In the lead up to 2008, most banks had adopted this approach to investment. They’d also chosen to do it in the same way, chasing the same types of assets and investment ideas. Although each individual bank had diversified their investments, there was little diversity in the way they had collectively done it.
