“Not only did the spike in the repo rate come as a surprise to the New York Fed, but they also haven’t been able to normalize it as quickly as they thought they could,” Bloomberg Opinion columnist and chief economic adviser at Allianz SE Mohamed A. El-Erian said Monday on Bloomberg TV. “It hasn’t proven to be temporary. It hasn’t proved to be reversible without massive injections of liquidity. Which means that structural issues are playing a role.”

Cash Buffers
Volatility in the amount of cash the U.S. Treasury keeps parked at the Fed also affected banks’ reserves. “The resulting drain and swings in reserves are likely to have reduced the cash buffers of the big four banks and their willingness to lend into the repo market,” the BIS team wrote.

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon has put the blame on regulators themselves. He said in October that his firm had the cash and willingness to calm short-term funding markets but liquidity rules for banks held it back.

Some analysts have also pointed to a new corner of the market which has seen immense growth: sponsored repo. This allows banks to transact with counterparties like money-market funds without impacting their balance sheet constraints. The downside is that it’s only available on an overnight basis, and as a result has further concentrated funding risk.

Along with changing market structure, the researchers also connected the repo ruckus to banks being somewhat out of practice in daily reserve management. That’s because trillions of dollars worth of Fed asset purchases -- the so-called quantitative easing program meant to help the economy recover from the 2008 financial crisis -- had left the banking system flush with cash for years.

Fed Campaign
“The internal processes and knowledge that banks need to ensure prompt and smooth market operations may” have started to decay, BIS wrote. “This could take the form of staff inexperience and fewer market-makers, slowing internal processes.”

The Fed in 2017 started shrinking its balance sheet and shortages began to re-emerge last quarter. The central bank stopped paring back holdings in August and started buying Treasury bills in October, an attempt to add reserves to the banking system. That was part of its campaign to keep the repo market calm, an effort that began in September with overnight and then longer-term repo operations.

“These ongoing operations have calmed markets,” the BIS researchers wrote.

Already, there’s been high demand from money-market participants for cash via repo that the Fed’s been offering with tenors that will extend into the new year. The central bank will conduct a 28-day term repo operation as well as an overnight one.

The BIS report also took a look at the European repo market, which escaped the kind of turmoil that engulfed the U.S. in September.