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The Interrupted Power Law and The Size of Shadow Banking

Davide Fiaschi (), Imre Kondor () and Matteo Marsili

Discussion Papers from Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy

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.

Date: 2013-07-16
Note: ISSN 2039-1854
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Working Paper: The Interrupted Power Law and The Size of Shadow Banking (2014) Downloads
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