18 ms·

The size of the shadow banking system estimated according to power law

58 points by 666_howitzer 13y ago

quarterto 13y ago
TIL: econophysics is an actual thing.
andyjohnson0 13y ago
"The shadow banking system is vastly bigger than regulators had thought, say econophysicists who have developed a powerful new way to measure its hidden impact" I had to read this a couple of times before I realised what was wrong, but apparently "Econophysics" really is a thing: "Econophysics is an interdisciplinary research field, applying theories and methods originally developed by physicists in order to solve problems in economics, usually those including uncertainty or stochastic processes and nonlinear dynamics. Its application to the study of financial markets has also been termed statistical finance referring to its roots in statistical physics." [1] [1] http://en.wikipedia.org/wiki/Econophysics http://en.wikipedia.org/wiki/Econophysics
- contingencies 13y ago
  George Soros knows a lot about financial systems. Strong evidence is the fact that he's rich and shares his perspectives, which are better than mainstream perspectives at interpreting market behavior particularly during major crises. My favourite quote of his is the oft-repeated notion that Classical economics is based on a false analogy with Newtonian physics. He generally spends some time either side of that comment making it really clear: there is no mystical market equilibrium of supply and demand, only the behavior of individuals.
- pierrealexandre 13y ago
  In my opinion the following paper is a good and accesible primer on econophysics: JP Bouchaud - The (unfortunate) complexity of the economy http://arxiv.org/abs/0904.0805 http://arxiv.org/abs/0904.0805
diziet 13y ago
One thing about Power Law distributions -- they work really great except at the outliers (ie, top 10). You can't always say that because incumbent #10 is x, #1 is 10x, especially when dealing with organizations that are huge conglomerates of different services, branches and sub-companies. Look at Market Caps of companies (something that we have public signals about): https://en.wikipedia.org/wiki/List_of_corporations_by_market_capitalization#2013 https://en.wikipedia.org/wiki/List_of_corporations_by_market... The difference between #1 and #10 is <2x, and #3-#10 all vary by just a few percent. Power Law distributions are great, but they tend to fail at the top end.
- diziet 13y ago
  I just wanted to present a counter argument to my reasoning: What if the list of companies (which is publicly traded companies) is missing the real head -- the non public companies that are either government owned or are governments themselves? If we look at the list of companies by revenue: https://en.wikipedia.org/wiki/List_of_largest_companies_by_revenue https://en.wikipedia.org/wiki/List_of_largest_companies_by_r... it does look like the real head of the Power Law distribution is missing.
  - arethuza 13y ago
    The original paper seems to take the Global 2000 and then re-orders them by asset size, not revenue: "we find that financial firms dominate the top tail of the firm distribution by asset size" http://arxiv.org/pdf/1309.2130v2.pdf http://arxiv.org/pdf/1309.2130v2.pdf
- pcrh 13y ago
  Intuitively one would expect that there are reasons why companies cannot be larger than a certain size (to exaggerate, none can be larger than the global economy). As companies approach their theoretical maximum, one would expect the distribution to deviate from the power law, as the actual data in the article demonstrates.
- cperciva 13y ago
  Clearly there must be a Shadow Corporate System and Apple is hiding close to $2T in it.
junto 13y ago
This is off topic, but does anyone else have a "This Week’s Top 5 Posts" section smack in the middle of the article? Is that something new Medium are automatically injecting? If so, I don't like it. I do like the idea of being pushed to more content _after_ I've finished reading, not _during_ the middle.
- huhtenberg 13y ago
  Came here to say the same. This is obnoxious. If it happens again, it'll be the last medium.com visit for me.
- aptwebapps 13y ago
  Whoops, thought that article was a little short ...
- jitl 13y ago
  I think that this "feature" is an arXiv exclusive -- the links point only to their articles. I left an angry comment on the link block: Is this “This Week’s Top 5 Posts” Medium’s new deal, or is it yours? This is like HuffPost mid-article attention-bait. I can’t stand it. I’ve previously equivocated Medium with an intense focus on single article content — no distractions. It was very confusing to find this totally unrelated link block here. I thought the article had suddenly ended. What sort of click-through statistics are they trying to drive here? They don't have pageviews to pump on Medium (do they?), so what's the play?
- cousin_it 13y ago
  Good point. It seems that if you wish to create value for end users, you should avoid middlemen, because middlemen will bundle your product with something obnoxious that adds value only for themselves. The more valuable your product is for end users, the more obnoxious stuff will be added by middlemen.
- dredmorbius 13y ago
  In my increasingly reflexive editing of website CSS: - I disable ALL nags. If there's a modal, slider, fixed bar, or fixed social element, I nuke it. - If it moves, I nuke it. - If anything is labled "viral", "tease", "nag", or "social" there's really good odds it's getting nuked. Really, stuff like that just makes it too easy, and I may add some wildcards to my default CSS. - Unless it's a premier site (e.g., NY Times, the Guardian), I'll nuke the "Recommended", "Trending", "Most Viral", etc., columns. - I'll strip any 3-column (or otherwise multi-column) format into a single column of body text, generally about 40-50 ems (about 850-1000px) wide. The LH column generally becomes a full-width header, the RH column a full-width footer. If they survive at all. - Bump all fonts to 15pt (body text), 14pt (usually for overview pages), 10-12pt for most navigation elements. - Backgrounds to to white or very close to it, text to black or very close. #fffff4 background, #222 foreground, is about as much as I'll push either. I've noticed that the result is much more soothing reading experiences, with far fewer distractions. It literally affects my ability to focus and peace of mind. Had my stylesheet manager (Stylebot) blow up on me a week or so back, having to deal with The Web As Published ... just drove me nuts. Most site's design simply sucks. I've got over 500 sites styled to my preferences (many are just very quick and light changes, a few more involved). The results are ... mostly pretty nice. Among my favorites: Buzzfeed: https://plus.google.com/photos/104092656004159577193/albums/posts/5890225669560306434?pid=5890225669560306434&oid=104092656004159577193 https://plus.google.com/photos/104092656004159577193/albums/... Unbuzzed: https://plus.google.com/photos/104092656004159577193/albums/posts/5890225669560306434?pid=5890225669560306434&oid=104092656004159577193 https://plus.google.com/photos/104092656004159577193/albums/... A 3-column to 1-column design: 3 cols: https://plus.google.com/photos/104092656004159577193/albums/5896495055961929169/5896495071944854994?pid=5896495071944854994&oid=104092656004159577193 https://plus.google.com/photos/104092656004159577193/albums/... 1 col: https://plus.google.com/photos/104092656004159577193/albums/5896495055961929169/5896495062245958898?pid=5896495062245958898&oid=104092656004159577193 https://plus.google.com/photos/104092656004159577193/albums/... And this seems to kill the "Top 5 posts" bits: blockquote.pullquote, blockquote.pullquote + p, blockquote.pullquote + p + p, blockquote.pullquote + p + p + p, blockquote.pullquote + p + p + p + p, blockquote.pullquote + p + p + p + p + p, blockquote.pullquote + p + p + p + p + p + hr { display: none; }
crntaylor 13y ago
The approach seems to be along the following lines: 1. Fit a model (in the case Zipf's law) to a semi-related field (the size of non-financial companies). 2. Find that the model doesn't fit reality in the field you're interested in (financial companies). 3. Posit that your model is correct and reality is wrong, and invent over $30 trillion worth of invisible activity to account for the difference. Alternatively... your model is just wrong?
- jasonwatkinspdx 13y ago
  This is an obvious and accurate criticism. But it's also worth considering that large financial firms are both the best equiped and most motivated to obscure their transaction activity, so I don't think it should be dismissed trivially. The question is: how could one find evidence that justifies or refutes the idea that the scale of firms does in fact fit zipf and that measure is being obscured at the tail? Also, I'd point out that the original post did not differentiate between financial and non financial companies in the way you do between points 1 and 2, so your characterization of what fields are related or "semi-related" is your own creation and not part of the original claim.
  - gee_totes 13y ago
    > The question is: how could one find evidence that justifies or refutes the idea that the scale of firms does in fact fit zipf and that measure is being obscured at the tail? Well, I think to find that evidence, you would have to take a measurement of the amount of shadow banking from one of these firms. Objectively, you can't do that, since there is no agreed upon definition of what the term shadow banking means.
- loup-vaillant 13y ago
  > Posit that your model is correct and reality is wrong Cough cough… The correct word is not "reality", but "currently well established models". This is less obvious than you make it out to be.
  - raverbashing 13y ago
phryk 13y ago
What happened to labeled axes? Is it not cool anymore to tell people what BOTH axes are supposed to be?
lotsofcows 13y ago
econophysicists? Wtf? If you want to avoid the term "economics" because most people associate it with "made up financial bollocks based on applying completely inappropriate models from unrelated disciplines", then why include the "econo" part. Also, you appear to be trying to be modelling a financial phenomenon by applying a completely inappropriate model from an unrelated discipline.
- jasonwatkinspdx 13y ago
  Derivatives trading is now dominated by quants with a background in the methods of computational physics. Aspects of gauge theory, etc are clearly and directly relevant. Don't reject this idea out of hand because it is unfamiliar to you. It may be proven a fad eventually, but that's not at all obvious now. As a concrete example: the Higgs result depends both on machine learning in the form of decision trees to minimize the data, as well as monte carlo simulation to generate theoretical data for comparison to what is measured. Experimental particle physics is very much now an exercise in machine learning and probabilistic simulation.
  - andyjohnson0 13y ago
    Physical laws exist. Objects in the real world have to follow those laws. I accept (I think) your point that ML and simulation can be used to "discover" those laws in some inductive sense. What I'm having a hard time with is the idea that markets necessarily have "laws" that are "discoverable" in the same way (which is what I think you're saying). They might do, and clearly some smarter people than me believe that they do, but where is the justification for this? @contingencies mentioned [1] a George Soros quote about classical economics being based on a false analogy with Newtonian physics and markets are just the behaviour of individuals. Observations of particles tell you the behaviour of the particles, but the behaviour is fully determined by underlying physical laws. I don't see how this is true of behaviour of actors in economics, except in the obvious respect that the bodies of traders and the hardware of trading systems are subject to the laws of physics. What am I missing here? I also wonder if there is a danger of building automated trading systems that are based on ideas from econophysics, and using their resulting behaviour are proof that the ideas were correct in the first place. [1] https://news.ycombinator.com/item?id=6481663 https://news.ycombinator.com/item?id=6481663
polskibus 13y ago
Under the broad meaning of Shadow Banking System, everyone speculating in any of the securities market would be a member of it. In my opinion this is very misleading and not really targeting the core feature, which is being a borrower and a lender of higher forms of money (reserves or deposits, not securities).
- polskibus 13y ago
  Why has this been downvoted? Can anyone share their view on Shadow Banking System definition?
scotch_drinker 13y ago
"On the Forbes Global 2000 list of the world’s largest companies, the first non-financial firm is General Electric, which ranks 44th." This is even scarier than the apparent fact that econophysics is a real thing. I'd like to know the history of the Forbes Global 2000 to get an idea over time of how dominant financial companies have been. I have a hunch they have always had a part (JP Morgan Chase anyone?) but surely this is a new phenomenon to be so dominated by companies that don't actually produce much.
- effn 13y ago
  If something seems scary/spectacular/surprising it's usually a good idea to do some fact checking. In this case it's very easy, since the authoritative source (Forbes) is available online. GE is 4th, not 44th. It seems to be a typo. http://www.forbes.com/global2000/ http://www.forbes.com/global2000/
  - puzzlingcaptcha 13y ago
    If you sort by Assets it is 44th alright.
    - mebassett 13y ago
      sorting by assets is a weird way to look at things. Given that banks manage people's money, you would expect them to dominate in assets. market value, profits, number of employees all sound like better metrics to get the "size" of a company. if by "size" you mean the influence it has over the world.
      - arethuza 13y ago
        Isn't it round the other way for banks - their assets are things like loans (which are liabilities to the borrowers)? If you deposit £50 pounds in the bank the cash becomes an asset of the bank and they create a matching liability to you because you probably want your money back at some point in the future....
lucozade 13y ago
The study takes on-balancesheet assets as a proxy for company size and fits a model to it that largely works. Fine so far. But the implication that this works at the top end is either that the companies are hugely mis-stating their on-balancesheet assets or that there are other companies, much bigger than FNMA, that have balancesheets with multiples of the GDP of the States. Neither of these explanations are plausible even if you believe that they're all lying, thieving scumbags. The numbers are just too big. However, there is another explanation. That on-balancesheet assets isn't a good proxy for size for big financial institutions. And all of a sudden the problem is solved because on-balancesheet assets isn't a good proxy for size for big financial institutions. Apart from anything else many of them run huge assets and liabilities off-balancesheet. BTW that doesn't make them secret, they hit the accounts just the same, it just means that the proxy in the study won't work. And for what it's worth, this is wholly orthogonal to the size of Shadow Banking, how much stuff is hidden in the Caymans etc etc. Fascinating and worrying subjects in themselves.
userulluipeste 13y ago
See the "Inside Job" (2010) documentary movie - (at least in USA) there were attempts to regulate the now unregulated banking activities. The banks' lobby was just too powerful and in result not only the banks remained unregulated, but the regulation system was reduced in staff and weakened.
- onebaddude 13y ago
  Or, people could read about how and what the shadow banking system is instead of watching a popular, slanted - albeit good, documentary. The "shadow banking system" aren't banks, that's the point. People underestimate just how regulated the banking system is, despite all the talk about more regulation.
  - userulluipeste 13y ago
    "People underestimate just how regulated the banking system is, despite all the talk about more regulation." I agree with you about underestimation, but I think that the surplus of the regulations that we're talking about here is more to keep the member circle small, therefore it is in the benefit of the incumbent banks. So there is: 1. strong regulation if you want to get in and 2. weak regulation (at least for some banking activities) for keeping you in check afterwards.
ChristianMarks 13y ago
It may be that the scale-free preferential attachment model doesn't hold in the generality claimed. The modeling technique of Doyle and Willinger may be more relevant [1]. 1. Walter Willinger , David Alderson , John C. Doyle. Mathematics and the Internet: A Source of Enormous Confusion and Great Potential. Notices of the AMS. Volume 56, Number 5. May 2009. http://www.ams.org/notices/200905/rtx090500586p.pdf http://www.ams.org/notices/200905/rtx090500586p.pdf
acro 13y ago
Banks are generally regulated, they have to have certain amount of assets to work. They cannot have the same distribution as normal companies do.
chernevik 13y ago
I've got a fun mathematical model supporting controversial assertions about banks. Yes, I could test those assertions against fact by reading the contingent liabilities sections of large banks' financial reports. But accounting is boring. And, let's face it, we all know that I'd just deal with negating evidence by arguing "accounting trickery" is just hiding Truth.

58 points by 666_howitzer 13y ago

TIL: econophysics is an actual thing.

"The shadow banking system is vastly bigger than regulators had thought, say econophysicists who have developed a powerful new way to measure its hidden impact" I had to read this a couple of times before I realised what was wrong, but apparently "Econophysics" really is a thing: "Econophysics is an interdisciplinary research field, applying theories and methods originally developed by physicists in order to solve problems in economics, usually those including uncertainty or stochastic processes and nonlinear dynamics. Its application to the study of financial markets has also been termed statistical finance referring to its roots in statistical physics." [1] [1] http://en.wikipedia.org/wiki/Econophysics http://en.wikipedia.org/wiki/Econophysics

contingencies 13y ago
George Soros knows a lot about financial systems. Strong evidence is the fact that he's rich and shares his perspectives, which are better than mainstream perspectives at interpreting market behavior particularly during major crises. My favourite quote of his is the oft-repeated notion that Classical economics is based on a false analogy with Newtonian physics. He generally spends some time either side of that comment making it really clear: there is no mystical market equilibrium of supply and demand, only the behavior of individuals.
pierrealexandre 13y ago
In my opinion the following paper is a good and accesible primer on econophysics: JP Bouchaud - The (unfortunate) complexity of the economy http://arxiv.org/abs/0904.0805 http://arxiv.org/abs/0904.0805

diziet 13y ago

One thing about Power Law distributions -- they work really great except at the outliers (ie, top 10). You can't always say that because incumbent #10 is x, #1 is 10x, especially when dealing with organizations that are huge conglomerates of different services, branches and sub-companies. Look at Market Caps of companies (something that we have public signals about): https://en.wikipedia.org/wiki/List_of_corporations_by_market_capitalization#2013 https://en.wikipedia.org/wiki/List_of_corporations_by_market... The difference between #1 and #10 is <2x, and #3-#10 all vary by just a few percent. Power Law distributions are great, but they tend to fail at the top end.

diziet 13y ago
I just wanted to present a counter argument to my reasoning: What if the list of companies (which is publicly traded companies) is missing the real head -- the non public companies that are either government owned or are governments themselves? If we look at the list of companies by revenue: https://en.wikipedia.org/wiki/List_of_largest_companies_by_revenue https://en.wikipedia.org/wiki/List_of_largest_companies_by_r... it does look like the real head of the Power Law distribution is missing.
- arethuza 13y ago
  The original paper seems to take the Global 2000 and then re-orders them by asset size, not revenue: "we find that financial firms dominate the top tail of the firm distribution by asset size" http://arxiv.org/pdf/1309.2130v2.pdf http://arxiv.org/pdf/1309.2130v2.pdf
pcrh 13y ago
Intuitively one would expect that there are reasons why companies cannot be larger than a certain size (to exaggerate, none can be larger than the global economy). As companies approach their theoretical maximum, one would expect the distribution to deviate from the power law, as the actual data in the article demonstrates.
cperciva 13y ago
Clearly there must be a Shadow Corporate System and Apple is hiding close to $2T in it.

junto 13y ago

This is off topic, but does anyone else have a "This Week’s Top 5 Posts" section smack in the middle of the article? Is that something new Medium are automatically injecting? If so, I don't like it. I do like the idea of being pushed to more content _after_ I've finished reading, not _during_ the middle.

huhtenberg 13y ago
Came here to say the same. This is obnoxious. If it happens again, it'll be the last medium.com visit for me.
aptwebapps 13y ago
Whoops, thought that article was a little short ...
jitl 13y ago
I think that this "feature" is an arXiv exclusive -- the links point only to their articles. I left an angry comment on the link block: Is this “This Week’s Top 5 Posts” Medium’s new deal, or is it yours? This is like HuffPost mid-article attention-bait. I can’t stand it. I’ve previously equivocated Medium with an intense focus on single article content — no distractions. It was very confusing to find this totally unrelated link block here. I thought the article had suddenly ended. What sort of click-through statistics are they trying to drive here? They don't have pageviews to pump on Medium (do they?), so what's the play?
cousin_it 13y ago
Good point. It seems that if you wish to create value for end users, you should avoid middlemen, because middlemen will bundle your product with something obnoxious that adds value only for themselves. The more valuable your product is for end users, the more obnoxious stuff will be added by middlemen.
dredmorbius 13y ago
In my increasingly reflexive editing of website CSS: - I disable ALL nags. If there's a modal, slider, fixed bar, or fixed social element, I nuke it. - If it moves, I nuke it. - If anything is labled "viral", "tease", "nag", or "social" there's really good odds it's getting nuked. Really, stuff like that just makes it too easy, and I may add some wildcards to my default CSS. - Unless it's a premier site (e.g., NY Times, the Guardian), I'll nuke the "Recommended", "Trending", "Most Viral", etc., columns. - I'll strip any 3-column (or otherwise multi-column) format into a single column of body text, generally about 40-50 ems (about 850-1000px) wide. The LH column generally becomes a full-width header, the RH column a full-width footer. If they survive at all. - Bump all fonts to 15pt (body text), 14pt (usually for overview pages), 10-12pt for most navigation elements. - Backgrounds to to white or very close to it, text to black or very close. #fffff4 background, #222 foreground, is about as much as I'll push either. I've noticed that the result is much more soothing reading experiences, with far fewer distractions. It literally affects my ability to focus and peace of mind. Had my stylesheet manager (Stylebot) blow up on me a week or so back, having to deal with The Web As Published ... just drove me nuts. Most site's design simply sucks. I've got over 500 sites styled to my preferences (many are just very quick and light changes, a few more involved). The results are ... mostly pretty nice. Among my favorites: Buzzfeed: https://plus.google.com/photos/104092656004159577193/albums/posts/5890225669560306434?pid=5890225669560306434&oid=104092656004159577193 https://plus.google.com/photos/104092656004159577193/albums/... Unbuzzed: https://plus.google.com/photos/104092656004159577193/albums/posts/5890225669560306434?pid=5890225669560306434&oid=104092656004159577193 https://plus.google.com/photos/104092656004159577193/albums/... A 3-column to 1-column design: 3 cols: https://plus.google.com/photos/104092656004159577193/albums/5896495055961929169/5896495071944854994?pid=5896495071944854994&oid=104092656004159577193 https://plus.google.com/photos/104092656004159577193/albums/... 1 col: https://plus.google.com/photos/104092656004159577193/albums/5896495055961929169/5896495062245958898?pid=5896495062245958898&oid=104092656004159577193 https://plus.google.com/photos/104092656004159577193/albums/... And this seems to kill the "Top 5 posts" bits: blockquote.pullquote, blockquote.pullquote + p, blockquote.pullquote + p + p, blockquote.pullquote + p + p + p, blockquote.pullquote + p + p + p + p, blockquote.pullquote + p + p + p + p + p, blockquote.pullquote + p + p + p + p + p + hr { display: none; }

crntaylor 13y ago

The approach seems to be along the following lines: 1. Fit a model (in the case Zipf's law) to a semi-related field (the size of non-financial companies). 2. Find that the model doesn't fit reality in the field you're interested in (financial companies). 3. Posit that your model is correct and reality is wrong, and invent over $30 trillion worth of invisible activity to account for the difference. Alternatively... your model is just wrong?

jasonwatkinspdx 13y ago
This is an obvious and accurate criticism. But it's also worth considering that large financial firms are both the best equiped and most motivated to obscure their transaction activity, so I don't think it should be dismissed trivially. The question is: how could one find evidence that justifies or refutes the idea that the scale of firms does in fact fit zipf and that measure is being obscured at the tail? Also, I'd point out that the original post did not differentiate between financial and non financial companies in the way you do between points 1 and 2, so your characterization of what fields are related or "semi-related" is your own creation and not part of the original claim.
- gee_totes 13y ago
  > The question is: how could one find evidence that justifies or refutes the idea that the scale of firms does in fact fit zipf and that measure is being obscured at the tail? Well, I think to find that evidence, you would have to take a measurement of the amount of shadow banking from one of these firms. Objectively, you can't do that, since there is no agreed upon definition of what the term shadow banking means.
loup-vaillant 13y ago
> Posit that your model is correct and reality is wrong Cough cough… The correct word is not "reality", but "currently well established models". This is less obvious than you make it out to be.
- raverbashing 13y ago

phryk 13y ago

What happened to labeled axes? Is it not cool anymore to tell people what BOTH axes are supposed to be?

lotsofcows 13y ago

econophysicists? Wtf? If you want to avoid the term "economics" because most people associate it with "made up financial bollocks based on applying completely inappropriate models from unrelated disciplines", then why include the "econo" part. Also, you appear to be trying to be modelling a financial phenomenon by applying a completely inappropriate model from an unrelated discipline.

jasonwatkinspdx 13y ago
Derivatives trading is now dominated by quants with a background in the methods of computational physics. Aspects of gauge theory, etc are clearly and directly relevant. Don't reject this idea out of hand because it is unfamiliar to you. It may be proven a fad eventually, but that's not at all obvious now. As a concrete example: the Higgs result depends both on machine learning in the form of decision trees to minimize the data, as well as monte carlo simulation to generate theoretical data for comparison to what is measured. Experimental particle physics is very much now an exercise in machine learning and probabilistic simulation.
- andyjohnson0 13y ago
  Physical laws exist. Objects in the real world have to follow those laws. I accept (I think) your point that ML and simulation can be used to "discover" those laws in some inductive sense. What I'm having a hard time with is the idea that markets necessarily have "laws" that are "discoverable" in the same way (which is what I think you're saying). They might do, and clearly some smarter people than me believe that they do, but where is the justification for this? @contingencies mentioned [1] a George Soros quote about classical economics being based on a false analogy with Newtonian physics and markets are just the behaviour of individuals. Observations of particles tell you the behaviour of the particles, but the behaviour is fully determined by underlying physical laws. I don't see how this is true of behaviour of actors in economics, except in the obvious respect that the bodies of traders and the hardware of trading systems are subject to the laws of physics. What am I missing here? I also wonder if there is a danger of building automated trading systems that are based on ideas from econophysics, and using their resulting behaviour are proof that the ideas were correct in the first place. [1] https://news.ycombinator.com/item?id=6481663 https://news.ycombinator.com/item?id=6481663

polskibus 13y ago

Under the broad meaning of Shadow Banking System, everyone speculating in any of the securities market would be a member of it. In my opinion this is very misleading and not really targeting the core feature, which is being a borrower and a lender of higher forms of money (reserves or deposits, not securities).

polskibus 13y ago
Why has this been downvoted? Can anyone share their view on Shadow Banking System definition?

scotch_drinker 13y ago

"On the Forbes Global 2000 list of the world’s largest companies, the first non-financial firm is General Electric, which ranks 44th." This is even scarier than the apparent fact that econophysics is a real thing. I'd like to know the history of the Forbes Global 2000 to get an idea over time of how dominant financial companies have been. I have a hunch they have always had a part (JP Morgan Chase anyone?) but surely this is a new phenomenon to be so dominated by companies that don't actually produce much.

effn 13y ago
If something seems scary/spectacular/surprising it's usually a good idea to do some fact checking. In this case it's very easy, since the authoritative source (Forbes) is available online. GE is 4th, not 44th. It seems to be a typo. http://www.forbes.com/global2000/ http://www.forbes.com/global2000/
- puzzlingcaptcha 13y ago
  If you sort by Assets it is 44th alright.
  - mebassett 13y ago
    sorting by assets is a weird way to look at things. Given that banks manage people's money, you would expect them to dominate in assets. market value, profits, number of employees all sound like better metrics to get the "size" of a company. if by "size" you mean the influence it has over the world.
    - arethuza 13y ago
      Isn't it round the other way for banks - their assets are things like loans (which are liabilities to the borrowers)? If you deposit £50 pounds in the bank the cash becomes an asset of the bank and they create a matching liability to you because you probably want your money back at some point in the future....

lucozade 13y ago

The study takes on-balancesheet assets as a proxy for company size and fits a model to it that largely works. Fine so far. But the implication that this works at the top end is either that the companies are hugely mis-stating their on-balancesheet assets or that there are other companies, much bigger than FNMA, that have balancesheets with multiples of the GDP of the States. Neither of these explanations are plausible even if you believe that they're all lying, thieving scumbags. The numbers are just too big. However, there is another explanation. That on-balancesheet assets isn't a good proxy for size for big financial institutions. And all of a sudden the problem is solved because on-balancesheet assets isn't a good proxy for size for big financial institutions. Apart from anything else many of them run huge assets and liabilities off-balancesheet. BTW that doesn't make them secret, they hit the accounts just the same, it just means that the proxy in the study won't work. And for what it's worth, this is wholly orthogonal to the size of Shadow Banking, how much stuff is hidden in the Caymans etc etc. Fascinating and worrying subjects in themselves.

userulluipeste 13y ago

See the "Inside Job" (2010) documentary movie - (at least in USA) there were attempts to regulate the now unregulated banking activities. The banks' lobby was just too powerful and in result not only the banks remained unregulated, but the regulation system was reduced in staff and weakened.

onebaddude 13y ago
Or, people could read about how and what the shadow banking system is instead of watching a popular, slanted - albeit good, documentary. The "shadow banking system" aren't banks, that's the point. People underestimate just how regulated the banking system is, despite all the talk about more regulation.
- userulluipeste 13y ago
  "People underestimate just how regulated the banking system is, despite all the talk about more regulation." I agree with you about underestimation, but I think that the surplus of the regulations that we're talking about here is more to keep the member circle small, therefore it is in the benefit of the incumbent banks. So there is: 1. strong regulation if you want to get in and 2. weak regulation (at least for some banking activities) for keeping you in check afterwards.

ChristianMarks 13y ago

It may be that the scale-free preferential attachment model doesn't hold in the generality claimed. The modeling technique of Doyle and Willinger may be more relevant [1]. 1. Walter Willinger , David Alderson , John C. Doyle. Mathematics and the Internet: A Source of Enormous Confusion and Great Potential. Notices of the AMS. Volume 56, Number 5. May 2009. http://www.ams.org/notices/200905/rtx090500586p.pdf http://www.ams.org/notices/200905/rtx090500586p.pdf

acro 13y ago

Banks are generally regulated, they have to have certain amount of assets to work. They cannot have the same distribution as normal companies do.

chernevik 13y ago

I've got a fun mathematical model supporting controversial assertions about banks. Yes, I could test those assertions against fact by reading the contingent liabilities sections of large banks' financial reports. But accounting is boring. And, let's face it, we all know that I'd just deal with negating evidence by arguing "accounting trickery" is just hiding Truth.