Question

What is the risk if a bank does not diversify its

loans?

Short answer

To avoid any market crash, diversification has to be done by the bank.

Step-by-step solution

Concept Introduction

Diversification is done to reduce the threat of the loss which may do in an investment. The idea of diversification is to reduce threat by doing multiple investments. If an investment suffers a downturn it'll have to sustain a full loss or ruin. By unyoking down the investment, one can reduce the implicit threat.

Explanation of Solution

Still, there's a threat to go void, If a bank doesn't diversify its loan. If a bank has a loan with a large number of companies within a particular circle and if the frugality takes a negative turn also there's a threat of going void. Diversifying means giving loans to colorful other guests like consumers with home or auto loans which are short term so that it creates an equal inflow to the bank as the request fluctuates. Therefore, to avoid any request crash, diversification has to be done by the bank.