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The Interrupted Power Law and The Size of Shadow Banking

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  • Davide Fiaschi
  • Imre Kondor
  • Matteo Marsili

Abstract

Using public data (Forbes Global 2000) we show that the distribution of asset sizes for the largest global firms follows a Pareto distribution in an intermediate range that is "interrupted" by a sharp cutoff in its upper tail, which is totally dominated by financial firms. This contrasts with a large body of empirical literature which finds a Pareto distribution for firm sizes both across countries and over time. Pareto distributions are generally traced back to a mechanism of proportional random growth, based on a regime of constant returns to scale: this makes our evidence of an "interrupted" Pareto distribution all the more puzzling, because we provide evidence that financial firms in our sample should operate in such a regime. We claim that the missing mass from the upper tail of the asset size distribution is a consequence of shadow banking activity and that it provides an estimate of the size of the shadow banking system. This estimate - that we propose as a shadow banking index - compares well with estimates of the Financial Stability Board until 2009, but it shows a sharper rise in shadow banking activity after 2010.

Suggested Citation

  • Davide Fiaschi & Imre Kondor & Matteo Marsili, 2013. "The Interrupted Power Law and The Size of Shadow Banking," Discussion Papers 2013/166, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
  • Handle: RePEc:pie:dsedps:2013/166
    Note: ISSN 2039-1854
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    References listed on IDEAS

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      • Tobias Adrian & Adam B. Ashcraft & Hayley Boesky & Zoltan Pozsar, 2010. "Shadow banking," Staff Reports 458, Federal Reserve Bank of New York.
    5. David C. Wheelock & Paul W. Wilson, 2012. "Do Large Banks Have Lower Costs? New Estimates of Returns to Scale for U.S. Banks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(1), pages 171-199, February.
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    Cited by:

    1. León, C., 2015. "Financial stability from a network perspective," Other publications TiSEM bb2e4e44-e842-45c6-a946-4, Tilburg University, School of Economics and Management.
    2. León, Carlos & Machado, Clara & Sarmiento, Miguel, 2018. "Identifying central bank liquidity super-spreaders in interbank funds networks," Journal of Financial Stability, Elsevier, vol. 35(C), pages 75-92.
    3. Carlos León, 2014. "Scale-free tails in Colombian financial indexes: A primer," Borradores de Economia 812, Banco de la Republica de Colombia.
    4. Carlos Serrano-Cinca & Begoña Gutiérrez-Nieto & Luz López-Palacios, 2015. "Determinants of Default in P2P Lending," PLOS ONE, Public Library of Science, vol. 10(10), pages 1-22, October.
    5. Davide Fiaschi & Imre Kondor & Matteo Marsili & Valerio Volpati, 2016. "The missing assets and the size of Shadow Banking: an update," Papers 1611.02760, arXiv.org.
    6. Adrian, Tobias & Breuer, Peter & Ashcraft, Adam & Cetorelli, Nicola, 2018. "A Review of Shadow Banking," CEPR Discussion Papers 13363, C.E.P.R. Discussion Papers.
    7. Gianfranco Battisti, 2014. "SHADOW BANKING - A Geographical Interpretation," ERSA conference papers ersa14p642, European Regional Science Association.
    8. Tobias Adrian & Adam B. Ashcraft & Nicola Cetorelli, 2013. "Shadow bank monitoring," Staff Reports 638, Federal Reserve Bank of New York.

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