From “too big to fail” to “too central to fail”

Swiss scientists want to develop a method to identify the center of economic or financial power

Who dominates the global economy? One may suspect that there are few transnational banks and companies that affect the bulk power. It is not all about the rough of financial institutions, but also how deep they are networked together and what role they play in these networks. Scientists of ETH Zurich have tried the discussion about the hypothesis that some banks are simply too crude to make them bleed (TOO Big to Fail) to put them on empirical bare and recognize which banks and companies actually with one Lock the system could danger.

Already in a study published in the Open-Source Journal PLOS-ONE, the Swiss economists for the first time not only examined a few companies, but as they write, develops a method to the "architecture" of the global network of companies and investors / owners with the calculation of the influence of each global player. From a database of 37 million companies and investors from the year 2007 they identified all 43.060 transnational companies and examined which property transactions exist between them. From this they calculated which companies control others through Shareholder networks. Connected to the inputs resulted from the structure of global economic power with a small, narrowly networked core of financial institutions, which as an economic "Super Entitat" can be considered.

737 Shareholder Uben a control of 80 percent of transnational companies. For the economic concentration, the wealth plays a much smaller role than the networking. 40 percent of the control of the economic value of transnational companies is above "A complicated network of ownership ratios" at 147 corporations that are almost completely controlled. Three quarters of these transnational corporations are financial institutions. Here are the first 20 most most powerful companies, Lehman Brothers, who had still existed in 2007, were on 34th 34:

  • Barclays PLC
  • Capital Group Companies Inc
  • FMR Corporation
  • Axa
  • State Street Corporation
  • JP Morgan Chase CO
  • Legal General Group PLC
  • Vanguard Group Inc
  • UBS AG
  • Merrill Lynch CO INC
  • Wellington Management Co LLP
  • Deutsche Bank AG
  • Franklin Resources Inc
  • Credit Suisse Group
  • Walton Enterprises LLC
  • Bank of New York Mellon Corp
  • Natixis
  • Goldman Sachs Group Inc
  • T Rowe Price Group Inc
  • Legg Mason Inc

In a new study, which appeared in the Scientific Reports, the team of ETH data of the Fed from the emergency loan program of the years 2008 to 2010 has evaluated to "Systemic risk" to calculate the individual financial institutions, which already appeared as transnational companies in the previously mentioned study. Here were banks that ran into financial difficulties, trimmed with cheap money by the central bank. 2008 were up to 1.2 trillion US dollars. The data on the debts and the market capitalization of 407 banks were not published by the Fed voluntarily, but only due to a judgment of the Supreme Court, which was a lawsuit of the news agency Bloomberg right. From the high levels of maintained loans, the debt of a bank and the pine risk will be recognizing and presenting in a newly developed debt ranking (debitrank), which should serve the danger of candidates that can be systemic risk because they are too close to the Core are networked, recognize. Scientifically, who should be identified who "TOO BIG TO FAIL" or rather: "TOO Central to Fail" is not to be dropped to the overall system not to danger.

from'too big to fail' zu 'too central to fail'

The network of systemic banks in the USA. Image: Scientific Reports

Of the 407 US banks, 22 were identified, which had not only received the coarse part of the loans with 8O4 billion dollars, but also formed a closely interwoven network whose nodes, the scientists, at the highlight of the financial crisis "systemically important" was. The financial institutions were all connected directly to each other and could influence accordingly, so that already "A small shock for the whole system through the many paths in the network to a systemic crisis" can lead. For systemic importance, in turn, the rough important is not only important, but the attributable to the core through the degree of networking. With the Ebstrank, which the scientists developed from the Pagerank of Google, all paths in a financial network are considered recursively: "The system relevance of a bank is calculated mathematically and the more weighted, the more its financial grade affects other banks, which are important for a smooth functioning financial system."

The scientists are of the opinion that they can be used by they developed by the Fed data methodology to recognize all systemic nodes of a network of financial institutions, which should be important for politics and risk managers – especially with the new category of companies or banks be made aware that are too central to make them collapse. Of course, this only applies if it comes to the stabilization of an existing network or system. You could also argue differently if the system was recognized as incorrectly and should be changed. Then those financial institutions had to be annulled, are the core of the system. However, the scientists have indeed expected a lot, but not included many factors – and prove not let with the study whether the method can predict actually systemic risk.

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