a) It's not financial, it's psychological. We're told by the media that the markets zig-zag up and down due to things called 'confidence', 'uncertainty' and sometimes 'panic'. Other nouns and adjectives are sometimes used, but not to labour the point, we are never, ever, given units of measurement. Aside from some commentator's opinion, how am I to tell whether these operands (confidence, panic, etc) have in fact risen or fallen over a significant period of time (confidinans? uncertainometers? panicons?), and what is the algorithm, precisely, which links these unmeasurable determinants to the value of my bank account and shareholdings and the price or availability of bread or cheese in the shop? Precisely, please, anyone who knows. Until anyone can quantify and define the logic of this stuff, I'm sticking with my theory, which is that the people whose decisions determine these outcomes - financial market traders - are in fact mad. In other words, they conduct their daily activities according to a pattern (behaviours determined by perceived information within an assumed framework of logic) which bears no relationship at all to the real world, such as you or me going down the shop to spend some money.
b) The mechanisms. No-one has commented on this yet. The liquidity crisis, i.e. the ability of banks to lend to each other to cover short-term positions, at LIBOR, is governed by the real time gross settlement (RTGS) system imposed by the Bank of England in the late 90s to protect against intraday bank failures like the Herstaddt case back in the seventies. In the UK (I assume similar set-ups exist elsewhere) each member of the inter-bank network (CHAPS) for wholesale payments has to demonstrate, per payment and within defined limits, that they have sufficient liquidity (cash or collateral) to cover that payment, right now. If not, the payment gets scheduled back and has to be resubmitted later.
I'm a long-retired ex-banker who hasn't kept up with this stuff at all; but it does cross my mind that an easy way for the BoE to kick-start the liquidity freeze would be simply to raise the RTGS threshold to infinity (minus one). That way, every interbank payment, for whatever reason, would be guaranteed, and the money would start to move around again.