Interbank lending dried up and borrowing from the Central Bank carried a stigma. So the banks started a price war. You are familiar with the concept of a price war, and why it's not necessarily a good thing for firms to engage in it, are you not?

In the short term, price wars are good for consumers, who can take advantage of lower prices. Often they are not good for the companies involved. The lower prices reduce profit margins and can threaten their survival.

In the medium to long term, they can be good for the dominant firms in the industry. Typically, the smaller, more marginal, firms cannot compete and must close. The remaining firms absorb the market share of those that have closed. The real losers then, are the marginal firms and their investors. In the long term, the consumer may lose too. With fewer firms in the industry, prices tend to increase, sometimes higher than before the price war started.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

Yes.¹

But more importantly, depositors don't ask for collateral. The discount window does. So when your balance sheet is full of shit, you are willing to pay your depositors for the privilege of not being asked questions.

If your balance sheet is not full of shit, however, there is no particular reason to prefer creditors who do not ask questions over ones who do.

- Jake

¹A lot of bankers (and, unfortunately, regulators) are witch doctors who target cutesy rules of thumb like "lending/deposit ratio," Taylor rules or "even banks around the rediscount rate." Most of these rules of thumb are bullshit, but pass for plausible under ordinary conditions, because they basically amount to "do the same thing you did yesterday."

Friends come and go. Enemies accumulate.