And that was the death blow for something that was already severely wounded: trust. Banks around the world started worrying about their exposures to what were known as subprime mortgage loans. Through new financial instruments, the risks from these loans had been spread across the banking sector – in very opaque ways.
Banks did not know how many of these risks were on the balance sheets of their business partners. And they did not know how to price these risks on their own balance sheets. Trust disappeared; banks stopped lending to each other and the interbank market broke down. There was a high risk that even healthy banks would run short of liquidity and fail.