DP15485 Choosing the narrative? The shadow banking crisis in light of Covid

Author(s): Marcus Miller
Publication Date: November 2020
Keyword(s): bank runs, epidemic contagion, equity constraints, Rating agencies, shadow banking, social contagion, technology and news shocks
JEL(s): G01, G24, G41, Y8, Z13
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15485

Could experiencing a health pandemic aid in understanding the nature of financial crisis? It might, for example, help to discriminate between different narratives that claim to do so. In this spirit, two influential accounts of the near-collapse of shadow banking in US financial crisis of 2008 are analysed: one developed by Mark Gertler and Nobuhiro Kiyotaki and the other presented by the Financial Crisis Inquiry Commission of the US Congress. Using a common two-sector framework, key features of these contrasting accounts of the market for banking services are presented, along with their corresponding diagnoses of what precipitated financial crisis. To see what the experience of Covid might imply about their relative credibility, four aspects of the current pandemic are considered: how it began from a small biological shock; how it gets spread by contagion; the significance of externalities; and how it may end with a vaccine. But the reader is left to form his or her own judgement.