Banks became quite uncertain about the losses they might have to absorb on mortgages and other lending, about the losses their counterparties might also suffer, and about the extent to which their liquidity was at risk from having to support offbalance-sheet entities or from experiencing a withdrawal by their own lenders.
This uncertainty made banks much more cautious about extending credit to each other and to households and businesses. As financial disruption continued and the economy weakened, lenders generally became much more uncertain about the financial condition of borrowers, sparking a strong preference for safe and liquid assets like Treasury bills.