It is important to note that the decline in the liquidity of bank funding markets and the decline in the liquidity of asset markets in general are not unrelated. As was vividly demonstrated during the crisis, liquidity in asset markets is tightly intertwined with the ability of financial institutions to raise funds in money markets.
Impairment in one market increased the likelihood of impairment in others. Indeed, market liquidity and funding liquidity of banks with trading operations are mutually reinforcing, creating the possibility of a “liquidity spiral” in a downward or upward direction.