Indeed, some economists have developed models in which market and funding liquidity reinforce each other, leading to the emergence of “liquidity spirals” that may account for some of the declines in the liquidity of markets and individual institutions observed from the start of the crisis.
2  BIS Review 147/2008  Protracted market illiquidity can also have potential negative repercussions for the banking sector and the economy as a whole. In fact, under normal market conditions, market illiquidity is typically short-lived, particularly since it creates profit opportunities for traders who, by providing extra funding liquidity, support the price discovery process and restore the smooth functioning of the market.