Explanation:
As it became apparent that off-balance-sheet investment vehicles, conduits, and other structured investments would most likely require the injection of more capital than initially anticipated, each bank’s uncertainty about its own funding needs took a sharp increase. Furthermore, the possibility of a bank turning to its “colleagues” for cash boosts after a minor shock became more uncertain, in part because the other banks most likely had similar financial issues. As a result, interbank market interest rates rose sharply relative to the Treasury bill rate.
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Q.420 Which of the following statements best describes why interbank market interest rates rose sharply relative to the Treasury bill rate during and in the aftermath of the 2007-2008 financial crisis?
A
The Federal Reserve Bank increased the rate of interest at which it was willing to lend to banks.
B
Losses incurred by banks combined with uncertainty on the part of structured investment vehicles meant that there was less money available for lending to other parties.
C
Interbank market interest rates were internationally linked while the Treasury bill rate was largely local.
D
As demand for mortgages worsened, profit streams for banks took a hit, meaning that there was less money for lending to other banks.
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