In the middle of September 2008 the crisis mutated from a loss of confidence in institutions pursuing aggressive and high-risk business models into a loss of confidence in all banks, with little regard to their actual exposure to potential credit losses. This was a run on the entire banking system of many countries. The resulting withdrawal of money from the world's banks was only stemmed by central banks acting as ‘lender of last resort’ to banks that could not otherwise obtain short-term funds, and only ended when governments committed large amounts of public money to strengthening bank balance sheets, providing banks with new capital and offering guarantees on a wide range of bank liabilities.

This chapter describes this run on the world's banks from the failure of Lehman Brothers on 15 September 2008 until the introduction of these massive packages of government support, and assesses the response of the authorities. These were an extraordinary four weeks, a period of great investor uncertainty with a huge impact on financial markets. Stock prices around the world swung wildly, with particularly large changes in the value of bank shares and equally astonishing movements of foreign exchange rates. The dislocation of money markets that had first emerged in summer 2007 worsened considerably. Wholesale funds were withdrawn from banks on a huge scale, and central banks vastly increased their balance sheets as they loaned banks money to replace these lost wholesale deposits.

Financial markets did eventually stabilize, but the economic impact will be longer lasting.