  The instability of the financial system as experienced in recent years and in
previous periods is often linked to credit defaults, i.e., to the failure of
obligors to make promised payments. Given the large number of credit contracts,
this problem is amenable to be treated with approaches developed in statistical
physics. We introduce the idea of ensemble averaging and thereby uncover
generic features of credit risk. We then show that the often advertised concept
of diversification, i.e., reducing the risk by distributing it, is deeply
flawed when it comes to credit risk. The risk of extreme losses remain due to
the ever present correlations, implying a substantial and persistent intrinsic
danger to the financial system.
