How Regulations, Shrinking Fed Balance Sheet Fueled Repo Mayhem

Stricter banking regulations enacted after 2008’s global financial crisis risk undermining the effectiveness of U.S. monetary policy in times of stress, according to a report examining the cause of turbulence in funding markets last September.

U.S. global systemically important banks have become the world’s “lenders-of-second-to-last-resort,” a new draft of a report written by Wenxin Du of the University of Chicago and two Federal Reserve economists concluded. That was the case in September when large banks tapped reserves at the Fed to increase short-term lending amid a quarter-end dollar shortage that saw interest rates in repurchase-agreement markets spike higher.

“The interaction ...