Banks trusted each other, both because bank defaults in developed economies had previously been rare events and because the very short loan periods minimised the risks that borrowers would not repay their loans. As a result, banks were happy to lend to other banks in large amounts at the same interest rate that they were charged when borrowing from the central bank.
Occasional differences of a few hundredths of a percentage point between these interest rates were interpreted as signs of stress, but they were often due to technical factors and therefore very short-lived. But in August 2007, in response to negative developments in the market for US sub-prime mortgages, uncertainty about the creditworthiness of many financial institutions suddenly increased.