And that is exactly what happened when the crisis in the US subprime market triggered a rapid loss of confidence among financial intermediaries on a global scale. As a result of it, uncollateralised interbank lending has been muted – the reasons for which are twofold. On the one hand, banks’ willingness to lend has fallen sharply due to mounting counterparty risks.
On the other, the uncertainty banks face with respect to their own longer-term liquidity planning has increased considerably. To alleviate ongoing tensions in interbank money markets, central banks from all over the world have acted as liquidity providers of last resort to the banking system.