One way of reconciling these seemingly mixed messages is to examine the relative contributions of counterparty risk and liquidity risk factors to money market spreads. A decomposition of the one-month euro area term money market spread into counterparty credit risk and other components, mainly liquidity risk, is plotted in the chart on the right of slide 4.
It shows that the role of credit risk seems to have diminished, while the contribution of other factors increased after mid-March, as liquidity concerns in money markets rose following the collapse of Bear Stearns, which induced banks to hoard more liquidity. Box 10 of the FSR elaborates on these issues.