As my data set doesn't extend back beyond 2004, I plot only from then.

The plateau in the middle of the chart with the ECB rates at 3-4-5% corresponds to the initial period of the crisis. The ECB raised rates by 0.25% on June 13, 2007, a week before Bear Stearns kicked off the financial crisis by closing its subprime hedge funds. Then the ECB was in a wait-and-see mode until March (around the time that Bear Stearns finally failed). You can see EONIA is rather chaotic during that period.

The other major qualitative feature of the chart is that prior to the Lehman failure interbank rates hovered above the main refinancing rate. However, since 15 october, 2008 (the start of the steep downward rate movement from the peak) the ECB MRO has been on "fixed rate, unlimited tender", which has allowed the banks to hoard cash and has dropped the interbank baseline to the deposit rate.

The fact that the baseline of interbank rates remains close to the deposit rate would seem to indicate that the banks are still hoarding cash. However, the ECB has been withdrawing liquidity from the system. The MRO is still "unlimited tender" but other "liquidity support" (in the form of unlimited auctions at maturities longer than a week) is being withdrawn. Here I have argued that the "bond sterilization" is, in fact, withdrawing liquidity too.

So, banks are hoarding cash but spare liquidity is very tight. This might explain the growing instability in EONIA. It might be a sign of very unequal states of health among European banks.

Looking into this I found the following from last September (with my emphasis):

But the two-pronged approach, while messy, could work. If unlimited cash was available only in one-week rather than three-month portions by then, the ECB would still get the normal impact from a rate hike.

"If you wanted to continue providing unlimited liquidity while raising interest rates, the system in Europe would in many ways facilitate that quite easily," said Societe Generale economist James Nixon.

"The impact of a 25 basis point hike would be exactly the same. It would just mean that overnight rates, instead of being centred around the ECB's main refinancing rate, would sit at a small margin to the deposit rate." The ECB's deposit rate is currently 0.25 percent, while the benchmark is 1 percent.

That could all change, though, if the health of vulnerable banks suddenly improved. Excess cash in the system would soon disappear as banks sucked it up, driving market rates the 75 basis points towards the refinancing rate.

Such a move, although likely to take time, would be bigger than any single interest rate hike in the ECB's history, and all without the ECB's finger going near the interest rate trigger.

By "suck up excess cash" Nixon doesn't mean "hoard" (which is what they're doing as the vulnerable banks are unhealthy) but actually "use".

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman