Before the crisis, banks’ demand for liquidity was predictable; it was set by reserve requirements. During the turmoil, unpredictable precautionary liquidity hoarding emerged as the dominating factor behind the demand. There were two important consequences. First, accurate measurement of the neutral level of aggregate liquidity became impossible; and second, the distribution of liquidity between banks started to matter.
During the acute phases of the crisis, the interbank market, which used to be extremely efficient in allocating central bank reserves, vanished almost completely.