Financial Intermediaries Simulation Study From Complex Adaptive System Perspective

Financial activities are closely connected to the economy. Almost allkinds of financial activities take place through financial intermediaries.Therefore, financial intermediaries hold fairly important positions in overalleconomic activity.Since the21st century, the forms of financial intermediaries have becomemore various. Completion among different parties has been increasingly fierce.Traditional financial intermediaries, for example, commercial banks,securities firms and insurance companies have been constantly changing theway they organize and operate while more new types of financialintermediaries evolved to join the competition, rendering a wide range offinancial intermediaries. With the deepening understanding of financialintermediaries, related theories have been continuously developed. A morecomplex financial system was formed by conscious adaptive activities andevolutions of all kinds of financial intermediaries.In the context of the above, this purpose of this study is to performsimulation study on financial intermediaries based on complex adaptivesystem theory. In contrast to the traditional econometrics research methods,Complex adaptive system simulation software platform Swarm is used toresearch the formation, development of financial intermediaries andequilibrium problems. The application of a financial early warning Swarmmodel and related policy recommendations is also discussed.The research method is constructing models for a simulation study ofcomplex adaptive system. Financial intermediaries Swarm model was built tostudy the ‘emerge’ scenario of financial intermediaries and marketequilibrium. Then a Swarm model of endogenous financial intermediaries wasformed to study the incentive mechanism between owners and management.Finally, a financial early warning Swarm model was proposed to simulate a multi-layered financial system, to research and make regulationrecommendations based on complex adaptive system.The basic content of this paper can be summarized in three areas. First, athrough literature review was conducted on traditional theories of financialintermediaries. Findings and applications of related theoretical studies bothhome and abroad, studies on theories of financial intermediaries andsimulation studies of complex adaptability were discussed. Sources, modelidea, structure and methods of the complex adaptability system simulationsoftware platform Swarm were also described. The concept of financialintermediaries’ complex adaptability system was proposed based on the studyon theories derived under different market conditions. The Subclass library ofSwarm, evolution simulation system platform EVO was also introduced.Second, the simulation study of complex adaptive system started with theemergence and decline of Shanxi Piaohao in China. By building Swarmsimulation models of both financial intermediaries and endogenous financialintermediaries, the ‘evolving’ scenario of financial intermediaries and marketequilibrium was analyzed. The concept of building a multi-layered financialsystem on the basis on the links was also introduced. Third, in terms of policyrecommendations, financial early warning Swarm model was proposed tosolve the problems in financial regulation. Relating with FSAP assessment,the application of financial early warning Swarm model was discussed.Recommendations were made on China’s financial regulatory framework andinformation technology development.Main findings and innovations of this paper are the following.1) Theproposition of using a complex adaptive system theory to explain and studyfinancial intermediaries solves the problem that traditional econometricstheories cannot dynamically unify the nature, behaviors and functions offinancial intermediaries.2) With the “evolving” scenario in complex adaptivesystem, financial intermediaries Swarm Model simulates the emergence offinancial intermediaries at micro-level, and analyzed the changes inequilibrium by adjusting variables to achieve links between financial intermediaries and financial system as a whole.3) The Swarm modelsexplained the nature, function, application and development of financialintermediaries, exploring the mechanism between owners and managements offinancial intermediaries and links between the models. Multi-layered Swarmmodel was also suggested.4) Relating with FSAP assessment, the applicationof financial early warning Swarm model was discussed. Recommendationswere made on China’s financial regulatory framework and informationtechnology development.The theoretical and realistic significance of this paper may lie on:1) Theapplication of Complex adaptive system theory on financial intermediariesprovides a theoretical basis for studying financial intermediariessystematically and dynamically.2) The application of complex adaptivesystem theory helps to observe financial intermediary’s self-adaptationactivities and ‘evolving’ scenario and market equilibrium.3) The set up offinancial intermediary Swarm simulation model helps to achieve linksbetween financial intermediaries and financial system as a whole, whichprovides a sound basis for future quantitative analysis. The introduction ofvariables and quantitative simulation predicts and analyzes financialintermediaries and financial market equilibrium.4) Adapting to the trend ofunification in financial sector regulation in China, links and simulation wereachieved by building cross-domain, cross-sector links through connectingsub-modules of different kinds of financial intermediaries in Swarm modes.5)A financial early warning Swarm model was proposed to simulate thefinancial intermediaries’ activities and the financial system as a whole and toprovide early warnings. The lack of early warning and post-control onsystematic risk in financial regulation, the cross-over and absence of financialregulation and the lack of international cooperation in financial regulation areable to be solved using financial early warning Swarm model.6) Theapplication of Swarm model on financial regulatory work, for example, to beused in the FSAP assessment was discussed, policy recommendations were made on China’s financial regulatory framework and information technologydevelopment.