Evening Brief – 05.05.23
To help restore confidence in the regional banking crisis, the American Bankers Association [ABA] has requested that federal authorities investigate a series of short sales of regional banks it believes were “disconnected from the underlying financial realities.”
In a letter addressed to Gary Gensler, Chair of the US Securities and Exchange Commission [SEC], the ABA alleges short sellers engaged in “abusive” practices that caused otherwise healthy banks to suffer significant losses. The ABA further stated it had noticed “extensive social media engagement.”
“We urge the SEC to consider all its existing tools and to take measures to reduce the avenues for abusive trading practices and restore investor confidence. These measures include, at a minimum, a clear message and appropriate enforcement actions against market manipulation and other abusive short selling practices,” the letter read.
There have been significant deposit flights from regional banks amid concern about pressure on banks’ balance sheets triggered by rapidly rising interest rates.
This week alone, LA-based PacWest and Arizona-based Western Alliance have seen their share prices get pummeled – although there was a slight reprieve on Friday. In PacWest’s case, it was forced to release a statement saying it was exploring strategic options while Western Alliance denied a Financial Times report that it was seeking a sale.
The ABA’s claim that some investors were engaging in short-selling was supported by Ortex data reported by Reuters. The analytics firm reported short sellers made nearly $400 million in paper profits betting against regional lenders.
ABA President Rob Nichols acknowledged that short selling could be a legitimate financial tool. But he stated that his group was firmly against practices that manipulate and abuse the markets.
Short sellers have piled into bank stocks since the collapse of Silicon Valley Bank in March, selling borrowed securities with an aim to buy them back once the share prices fall. The trend has gathered momentum following the failure of First Republic, and a threat to the availability of credit resulting from the damage being inflicted on banks is a significant risk.
If anything, the interest rate market indicates investors are even more convinced now that stress in the banking sector is far from over.