tThough relatively small, the subprime mortgage-backed securitiesmarket is often identified as the source of the crisis that sweptthrough the U.S. financial system from 2007 onwards. We investi-gate if its role in the propagation of the crisis was due to contagionor interdependence. Using a Markov-switching VAR with time-varying transition probabilities, we analyse the transmission ofshocks across the financial system. We find little evidence of assetcorrelation changes between normal and crisis regimes and thosethat do occur are predominantly associated with liquidity vari-ables. Otherwise, relationships are stable across market conditions,implying that the U.S. financial crisis was due to cross-marketinterdependencies rather than contagion. There is limited evidencethat the deteriorating quality of the underlying assets can explainthe transition from ‘normal’ market conditions to a high-volatilityregime, although this is not consistent across model specifications.