Banks and other lenders do not let their cash just sit around, so they are constantly making new loans using payments from previous loans. Cross calling happens when a lender uses the interest payments from low interest rate loans to repay their high-yield mortgage backed securities, for example.
Let’s say a bank in the wild days of 2008 made two mortgage loans at 6% and 9% interest rates, respectively. A cross calling takes place when the lender converts these loans into high-yield, high-risk, mortgage-backed securities and sells them to investors with coupon rates of 8% and 14%. (Coupon rates are the yields paid by the issuer of the securities.)
The bank then uses the interest payments on the 6% loan to help pay the coupon principal on the 14% mortgage-backed security.
The only problem with this scenario is that those who are holding the 8% securities must now rely on the more risky 9% mortgage loan for their coupon payments, or be left holding the bag.