Economists Estimate the Sized of Shadow Banking System at $67 Trillion in 2011

A group of Italian Economists estimated in 2013 that the size of the international shadow banking system was around $67 Trillion USD. They used the widely observed economic relationship that total visible assests and and balance sheets of financial entities follow an exponential relationship, ie. the entities at each higher level of the ‘pyramid’ are not 2 or 3 times bigger than the ones in the level below, but at least 10 times bigger. This is known as the ‘power law’. They then extrapolated this law to large financial entities such investment banks whose reported assests and balances did not appear to follow this law:

“For example, the UK’s Royal Bank Of Scotland is the 12th largest firm on the planet with assets of $2.13 trillion.

If the size of these firms followed a power law, the largest would be ten times bigger than the 10th on the list. But that isn’t the case. But the world’s largest, Fannie Mae, has assets worth $3.2 trillion, just 50% larger than the Royal Bank of Scotland.

Why the discrepancy? Fiaschi and co hypothesise that the difference is equal to the size of the shadow banking system, which is not captured in the balance sheets of the largest financial firms.”

Thus the implication is that the largest financial entities world wide are engaged in ‘shadow banking’ practices and hide the true amount

of assets, trades and balances through activities such as as

“hedge funds, private equity funds, credit insurance providers and so on”

The preprint has since been peer reviewed and published in journals… google the paper to find it.

Link to summary article article: medium.com/the-physics-arxiv-blog/the-true-size-of-the-shadow-banking-system-revealed-spoiler-humongous-5e1dd9d1642

arxiv.org/abs/1309.2130

 

h/t ReasonableAdagio4

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