The US subprime turmoil that first emerged in August 2007 and morphed into an international financial crisis following the bankruptcy of Lehman Brothers in September 2008 was a shock that affected output globally (BIS (2009)). Long before Lehman’s failure, fear of counterparty defaults had disrupted interbank funding markets, including both secured and unsecured money markets. The fall in US housing prices that started in 2006 generated large losses during late 2007 and early 2008 on bank holdings of subprime-related assets which were propagated to European banks directly through their subprime investments and indirectly through their counterparty exposures to US.
