Interbank market The sub-prime crisis made itself felt in interbank markets at the beginning of August 2007 when overnight rates started trading at unusually high spreads to the MRO rate. This reflected some banks’ perceived need to hedge against adverse liquidity risk.
The collapse of Lehman then transformed the money market tensions into a full-blown crisis as a vicious circle of increased liquidity and credit risk brought interbank trading to a virtual halt. Money markets meanwhile became extremely segmented according to specific bank names: the uncertainty surrounding holdings and values of mortgage-related financial products shut specific counterparties out of the interbank market.