Visualizing TBTF: The Hub And Spoke Representation Of Modern "Scale Free" Banking

Tyler Durden's picture


In a few moments we will post a critical analysis by David Korowicz, titled Trade-Off: Financial System Supply-Chain Cross- Contagion: a study in global systemic collapse, arguably one of the best big picture overviews of the New Normal in systemic complexity, which considers the "relationship between a global systemic banking, monetary and solvency crisis and its implications for the real-time flow of goods and services in the globalised economy" and specifically looks at how various "what if" scenarios can propagate through a Just In Time world in which virtually everything is connected, and in which even a modest breakdown in one daisy-chain can lead to uncontrolled systemic collapse via the trade pathways more than ever reliant on solvency, sound money and bank intermediation. In summary, Korowicz shows why we as a society, are now consistently on "the edge."

But before that we wanted to present schematically, and narratively, one of the more important topics of the past several years, namely the "scale-free" nature of modern banking, in which very few Hub financial institutions impact an exponentially increasing number of Spokes, a phenomenon which "opened up the possibility of 'too big to fail' and 'too big to save' banks, that is, a small group of banks that were 'hubs' of the global banking system. Upon this small number of super-connected banks stand the operations of lots of small ones." Of course, this phenomenon will not be news to anyone who has read either Taleb's works on "non-scalability" and Soros' philosophical ruminations on "reflexivity." Regardless, here it is in its full visual glory.

Korowicz describes the relationship map as follows:

The major banks hubs of the international financial network show high levels of connectivity and interdependence. The links are weighted to represent the strongest relations between banks. The colours represent different geographic areas, European Union  (red), North America (blue), other countries (green).

He goes on:

Prior to the beginning of the financial crisis, risk management by regulators was focussed on individual banks. In addition it was common to hear how increased interconnection and integration between banks reduced systemic risk by dispersing individual bank risk over the whole system. The crisis prompted a wave of studies, drawing particularly upon ecology, emphasising how the structure between banks could increase systemic risk.


This included collective effects like herding, in which financial networks enabled imitative strategies in the search for yield, or transmitted collective euphoria or panic. They also showed how deregulation and connectivity had removed 'circuit-breakers' in financial systems such as the integration of retail banks into merchant banks trading on their own account. The effectiveness of fire-breaks and the vaccination of super-spreaders show how 'modularity' can inhibit contagion in natural systems. Indeed, the 'fire- break' of the nonfree traded Chinese Yuan probably stopped the 1997 Asian financial crisis from being far more serious.


Further the nature of the connections between banks was explored. Each bank was not connected at random to other banks, rather a very small number of large banks were highly connected with lots of other banks, who had few connections to each other. These arrangements are sometimes known as scale-free networks. Preferential attachment is a way of generating such scale-free networks - big banks have greater economies of scale and bargaining power, so can attract more business than their smaller rivals with better deals or market crowd-out, thus generating even greater economies of scale and so on.


For example, when the Federal Reserve Bank of New York commissioned a study of the structure of the inter-bank payment flows within the US Fedwire system they found remarkable levels of concentration. Looking at 7,000 transfers between 5,000 banks on an average day, they found 75% of payment flows involved less than 0.1% of the banks and 0.3% of linkages.


While this type of scale-free structure can reduce local risk, it can also help to displace and concentrate large-scale systemic risk. A random failure in a scale-free network is likely to affect a node of low connectivity, with small implications. However, the failure of a hub node has a disproportionate impact, especially if those hub nodes have high connectivity to each other. This concentration opened up the possibility of 'too big to fail' and 'too big to save' banks, that is, a small group of banks that were 'hubs' of the global banking system. Upon this small number of super-connected banks stand the operations of lots of small ones.


Thus we see the primary financial monetary keystone-hub with little or no redundancy, underpinned by a secondary banking  system that comprises high, but not quite as high levels of concentrating hubs.

As a reminder, this is merely a tiny preamble into what will be a far more extensive overview of the complexities of the modern world in which finance, "sound money", economics, trade, and of course solvency are tightly woven into a fabric that defines our everyday lives, and in which the smallest shock has the potential to propagate through the system in unpredictable, Lorenzian patterns with massive avalanche-like follow through aftereffects.

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Sat, 07/14/2012 - 22:08 | 2616658 francis_sawyer
francis_sawyer's picture

Talk about "vizualizing" WHIRRLED PEAS...

Sat, 07/14/2012 - 22:16 | 2616667 Dr Benway
Dr Benway's picture

The conclusion that such a tiny proportion of banks account for such a large proportion of transactions is stunning, but kind of hard to gather from the infographic?


Another part of the problem is that everyone is buying shares in each other to prop up share prices

Sat, 07/14/2012 - 22:34 | 2616689 sunaJ
sunaJ's picture

Muppetology: verse 3


Little Miss Muppet
Made good of the junket,
the bribes and grand larceny.

With nobody left
But the poor and bereft,
Miss Muppet now hangs from a tree.

Sun, 07/15/2012 - 19:43 | 2618809 BigJim
BigJim's picture

I find it very hard not to fantasize that a group of veterans, pissed-off at seeing their comrades die to prop up the MIC, decide to teach the bankers a few lessons by simultaneously blowing up a few of these 'TBTF' banks.

Kind of like Fight Club... but for real.

Sat, 07/14/2012 - 22:17 | 2616669 lewy14
lewy14's picture

Very similar graph-theory observations apply to the internet - a resiliant architecture once "capable of surviving nuclear attack" is now tiered and concentrated in a bunch of super-hubs (preferential attachment operates in the network domain too).

Sun, 07/15/2012 - 10:19 | 2617163 Biosci
Biosci's picture

And in network biology.  The more links a gene has to other genes (those links can be physical interaction between their cognate proteins or "functional interaction" in that they operate in the same molecular system), the higher the likelihood that it is an "essential" gene.  And when you knock out an essential gene, through lab manipulation or real-world mutation, the whole cell dies.

Sat, 07/14/2012 - 22:19 | 2616671 ultraticum
ultraticum's picture

Web of death.

Sat, 07/14/2012 - 22:33 | 2616688 Bananamerican
Bananamerican's picture

looks like a Bankomegalovirus 

Sat, 07/14/2012 - 22:42 | 2616672 AssFire
AssFire's picture

So, They are all fuckin' their cousins?


Now, back into my hole...(with my bottle of Belvedere).

Sat, 07/14/2012 - 22:22 | 2616675 Yen Cross
Yen Cross's picture

 These  Vortexes, are getting old!

     Singularity is upon us!

Sat, 07/14/2012 - 22:39 | 2616697 q99x2
q99x2's picture

At least the collapse is more likely with this level of irresponsibility.

I'm not exactly desiring collapse but this S&P 1300 for years on end is killing me.

Time for those old fuckin elite to step aside and let the humankind move on already.

Sat, 07/14/2012 - 22:44 | 2616701 francis_sawyer
francis_sawyer's picture

It's summertime... That's when these fucks get their rocks off doing human sacrifices, biting the heads off of chickens, jacking off goats & parading around in masks & diapers & shit...

Gotta be a bit more patient...

Sun, 07/15/2012 - 00:05 | 2616760 AssFire
AssFire's picture

Yep, I remember when I jacked off my first goat at the SEC entrance exam.

Sun, 07/15/2012 - 10:36 | 2617186 ParkAveFlasher
ParkAveFlasher's picture

Not to argue against any ZH noteworthies, and I accept that I am still a humble pledge, but I believe the ACTUAL ceremony involves LICKING THE GOAT'S ANUS, specifically, NOT jacking it off.

Sat, 07/14/2012 - 22:41 | 2616699 catch edge ghost
catch edge ghost's picture

Heuristic Unified Balance Sheet

Sat, 07/14/2012 - 22:56 | 2616725 world_debt_slave
world_debt_slave's picture

As Roubini stated the banksters have been at this game for hundreds if not thousands of years.

Sat, 07/14/2012 - 23:01 | 2616731 Imminent Collapse
Imminent Collapse's picture

A country boy will survive.

Sun, 07/15/2012 - 07:47 | 2617046 Dr. Sandi
Dr. Sandi's picture

Until an angry earth lurches up and swallows him whole for his race's transgressions against her.

Sat, 07/14/2012 - 23:26 | 2616755 Dr. Engali
Dr. Engali's picture

The more they overthink the plumbing, the easier it is to stop up the drain.

~ Montgomery Scott~

Sun, 07/15/2012 - 00:01 | 2616798 williambanzai7
williambanzai7's picture

Notice that the Chinese Banks are not on there. Even though they are among the biggest.

Sun, 07/15/2012 - 03:35 | 2616956 onebir
onebir's picture

Maybe that's to do with limited convertbility of the RMB? But there don't seem to be ANY LDC banks on there...

Sun, 07/15/2012 - 10:00 | 2617137 Ghordius
Ghordius's picture

+1 for noticing. The picture overrepresents the EU tangle, does NOT take in account the Central Banks or differentiate in the currency spheres, does not show the predominancy of the Big Five Megabanks through the derivatives market and leaves the Asian quite out.

Sun, 07/15/2012 - 04:51 | 2616970 falak pema
falak pema's picture

What we need is to release a spider killing device for this web to implode. SPider killing is easy if you know that spiders hate : smelling bleech and they hate rain! 

Bleech powder and rain eases spider pain! Cats and dogs also love black widows inspite of their venom.

Sun, 07/15/2012 - 04:54 | 2616971 DutchR
DutchR's picture

For some free sunday fun, use the search field (right top).

Mapping the paths of power and influence:
Sun, 07/15/2012 - 10:17 | 2617156 deepsouthdoug
deepsouthdoug's picture

Map shows no direct connection between Merrill Lynch and Bank of America?  Hmm......

Sun, 07/15/2012 - 16:36 | 2618293 TraderTimm
TraderTimm's picture

This is why I think the blockchain and bitcoin will side-step the banks much in the same way peer-to-peer has side-stepped the media distribution companies. Look at the big bank hub chart - its a big ball of crystallized rock candy that will shatter into a million pieces if it hits the 'floor'.

I swear, this is going to be the end of conventional finance as we know it.

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