This perception led to an underpricing of the risks embedded in these money-like instruments, making them an artificially cheap source of funding and creating an oversupply of these instruments that contributed to systemic risk. Contractually committed credit and liquidity support lends itself more readily to regulation than does implicit support.
On the morning of 10 August, banks started telling us that they were noticing a reduced flow of funds through the market. The cost of raising funds in global markets through swaps had risen noticeably, putting more pressure on domestic funding sources. Yields on banks bills had jumped sharply overnight, and LIBOR rates by even more (Graph 9).