Perotti explains that while banks may experience instability due to the coronavirus crisis, shadow banking may be at risk. The term shadow banking refers to lending and other financial activities conducted by unregulated institutions. Unlike banks, however, these institutions do not have access to central bank funding or safety nets like deposit insurance.

Liquidity risk

His column argues that ‘coronavirus shock poses a serious liquidity risk for the shadow banking sector, where significant funding has been extended on the basis of cash flow rather than real collateral’. 

In addition to the column, Perotti was also interviewed about the same topic. Both Perotti’s column and the interview can be viewed on VOX’s Centre for Economic Policy Research (CEPR) website portal.