Anatomy of financial instability It was the abrupt breakdown of trust following the collapse of Lehman Brothers in midSeptember 2008 that caused financial markets in advanced economies to go into seizure.
Suddenly, there was a great deal of uncertainty not only about the extent of losses and the ability of banks to withstand those losses, but about the extent of risk in the system, where it lay and how it might explode. This uncertainty triggered unprecedented panic and almost totally paralyzed the entire chain of financial intermediation. Banks hoarded liquidity.