1.) The biggest trigger was subprime borrowers’ large (in absolute terms) losses of residential mortgage loans. IKB’s Rhineland off-balance-sheet vehicle was also no longer rolling over the ABCP it issued in U.S, markets to fund its asset-backed securities. Commercial paper investors feared risk of default on these securities because of IKB’s difficulty in meeting its funding obligation. This led to runs on key institutions which had a detrimental effect on the financial system as a whole. This “Run on Commercial Paper” occurred because it is easier and safer for lenders to withdraw their money in this type of situation even if the vehicles had no exposure to subprime mortgages. Thus, this financial strain also spread to the bigger banks that were funding these vehicles. This caused short-term funding in interbank market to freeze up. This, with the growing instability in global money, hurt the flow of lending to nonfinancial borrowers and ended up being more damaging than the subprime losses.
Another trigger was a “sudden stop” in syndicated lending to large risky corporate borrowers because funding for these loans had recently transitioned from banks to special purpose vehicles that funded themselves through CLOs that were purchased by a variety of investors, including ABCP vehicles. This sudden stop was viewed negatively by investors and contributed to triggering the crisis.

2.) One of the vulnerabilities was the dependence on unstable short-term funding. Shadow banks, which are intermediaries not subject to regulation, had become dependent on short-term wholesale funding leading up to the crisis, which were growing rapidly and insured and made the shadow banks susceptible to runs (similar to the freeze up in secondary markets for ABCP). Since runs tend to blur the lines between insolvent and illiquid firms, the increase in perceived risk leads to financial