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Ron O'Hanley, president and chief executive officer of State Street Corp., at a House Financial Services Committee hearing on April 10, 2019 in Washington. Photo: Alex Wroblewski/Getty Images

A growing number of market analysts are voicing concerns that the repo market shock in September may have been the first signal of a wide-ranging liquidity shortage, and now those warnings are being echoed by the heads of major banks.

The state of play: "Despite the fact that bank balance sheets are quite strong, I think you’ll see more moments like this going forward," Ron O'Hanley, president and CEO of State Street, said during the Institute of International Finance's annual membership meeting on Saturday.

What's happening: Even with the Fed's commitment to pump $60 billion a month into financial markets, there still may not be enough funding because of regulations, changes to market structure, and banks' desire to keep their reserve levels high.

  • Strategist from JPMorgan, Goldman Sachs and Bank of America sent recent notes also warning of the funding issues.
  • Additionally, the increase of passive investments and major flows from pension funds and large asset managers into private equity funds is drying out typical sources of liquidity to the stock market and could mean major outflows in the face of bad news.

What they're saying: Brian Porter, president and CEO of Scotiabank, said he also is worried about the health of the so-called shadow banking sector — firms that are not banks but lend money to consumers for things like auto loans or home mortgages and aren't subject to the same regulations.

The shadow banking sector is largely private and little is known about how much money the insurance companies, hedge funds, private equity funds and payday lenders that make up the industry actually have.

  • "Regulators have been very successful in distributing risk," O'Hanley said. "It’s now been very much deconcentrated. But it hasn’t gone away; it’s been moved."

Don't sleep: IIF president and CEO Tim Adams likened it to the market for mortgage-backed securities before the housing bubble burst in 2007, triggering the global financial crisis.

  • "We used to make the same case on securitization of mortgages — that we could slice them and dice them and we distribute risk globally and it was a safer system because it was distributed," Adams said.
  • "We found out that wasn’t necessarily the case."

Go deeper

Alabama trying to use COVID relief funds to expand prisons

Inside the Julia Tutwiler Prison for Women in Wetumpka, Ala., in 2018. Photo: Paul Zimmerman/Getty Images

Alabama state lawmakers are trying to funnel up to $400 million of the state's American Rescue Plan funds to pay for a $1.3 billion plan to build and renovate prisons across the state, the Associated Press reports.

Why it matters: Diverting dollars from the COVID-relief package, passed in March, is prompting criticism over misuse.

2 hours ago - World

Jake Sullivan discussed human rights and Yemen with Saudi crown prince

MBS in 2018. Photo: Fayez Nureldine/AFP via Getty

White House national security adviser Jake Sullivan and Saudi Crown Prince Mohammed bin Salman discussed efforts to end the war in Yemen, the de-escalation of regional tensions with Iran, and Saudi Arabia's human rights record in their meeting on Monday, a senior U.S. official told Axios.

Why it matters: This was Sullivan's first trip to the Middle East since taking up his post in January, and he was the most senior visitor to the kingdom so far from the Biden administration, which has kept the crown prince at arm's length over his roles in the murder of Jamal Khashoggi and the war in Yemen.

Updated 4 hours ago - Politics & Policy

Top Pentagon officials contradict Biden on Afghanistan advice

Photo: Carolone Brehman/Pool/AFP via Getty Images

Top military leaders confirmed in a Senate hearing Tuesday they recommended earlier this year that the U.S. keep 2,500 troops in Afghanistan, and that they believed withdrawing those forces would lead to the collapse of the Afghan military.

Why it matters: Biden denied last month that his top military advisers wanted troops to remain in Afghanistan, telling ABC's George Stephanopoulos: "No one said that to me that I can recall."