##ness of bank and government finance. secured and unsecured money markets : the us and the euro area experience money markets are vital funding markets for financial institutions. i would like to highlight some key developments across various money market segments from the onset of the financial crisis to its most critical point in the autumn of 2008, and the trends that have been observed since then. while my main focus will be on the euro area, i will allude to some us developments as well, not only because the crisis had its origins in the us sub - prime market, but also to underscore the importance of the different structural characteristics of the two financial systems in determining which money market trends affected banks ’ access to funding most. bis central bankers ’ speeches the start of the financial crisis in the summer of 2007 was triggered by a sudden re - pricing in the us sub - prime mortgage market, on account of risks not being properly reflected in the price of the related instruments, in particular mortgage - backed securities and collateralised debt obligations. a market - wide reassessment of financial risk led to sharp increases in premia and spreads across credit markets. opacity in banks ’ balance sheets, coupled with uncertainty about the real valuation of their assets, led to acute tensions in the markets for credit instruments. the crisis became systemic when these tensions spread to money markets worldwide in early august 2007. some banks were facing direct exposures to “ toxic ” sub - prime assets ; others needed liquidity to be able to honour committed credit lines to so - called conduits, bank - sponsored investment funds. these off - balance sheet entities, a part of the large shadow banking sector in the us, became unable to roll over short - term financing in the us asset - backed commercial paper market ( abcp ) amid great uncertainty about asset valuations. 1 these events reinforced each other and generated uncertainty about both the solvency and liquidity of money market participants, as the extent of sub - prime exposures was unknown and counterparties could not distinguish good banks from bad. 2 longer - term unsecured money markets, the most heavily exposed to counterparty credit risk, showed signs of stress, as signalled by the spread between the three - month unsecured interbank rate ( libor for the us and euribor for the euro area ) and the overnight index swap in three months ’ time ( ois ), a standard measure of tensions in unsecured markets. 3 chart 1 shows the spread

on private sector securities, while haircuts on government bonds, which constitute the bulk of assets used as collateral in repo transactions, increased only modestly. 8 however, some key dealer banks with large exposures to private sector securities were heavily affected by the contraction in repo. as a result, these institutions reduced lending to other players in the shadow banking system. the shadow banking system in the euro area is less important than in the us, as it constitutes less than half of the total assets of the banking sector. ( assets held by shadow banking - related sectors in the euro area were estimated to amount to €10. 8 trillion in the second quarter of 2011 ). 9 a major fraction of intermediation in money markets occurs at the interbank level. still, interbank markets in the euro area came under severe stress because of weaknesses in parts of the banking system : in some countries banks were heavily exposed to real estate and housing bubbles ; in other countries banks suffered from sovereign risk exposure. €52 billion between 9 august 2007 and 26 september 2008. this increase could reflect a shift towards more short - term financing in the interbank market. see heider et al. ( 2009 ) cited above for details. see g. afonso, a. kovner, and a. schoar, “ stressed, not frozen : the federal funds market in the financial crisis ”, journal of finance, vol. 66, no. 4, 2011. for details, see k. bakk - simon, s. borgioli, c. giron, h. s. hempell, a. maddaloni, f. recine, and s. rosati, “ shadow banking sector in the euro area : an overview ”, ecb occasional paper no 133, 2012. krishnamurthy et al. ( 2012 ) report that a full - scale “ run on repo ” did not seem to have occurred ( unlike in the abcp market ). see a. krishnamurthy, s. nagel and d. orlov, “ sizing up repo ”, nber working paper no 17768, 2012. this contrasts with previous studies, for example, g. gorton and a. metrick, “ securitised banking and the run on repo, ” journal of financial economics, forthcoming. see bakk - simon et al. ( 2012 ) cited above. the shadow banking aggregate corresponds to a sector comprising the other