Renewed Concerns over Regional Banks and the Debate over Short-Selling Bans -

Renewed Concerns over Regional Banks and the Debate over Short-Selling Bans

May 15, 2023

In recent times, renewed concerns over regional banks have created an uncomfortable situation for regulators. They have resorted to unusual measures, such as facilitating and allowing the largest U.S. banks to grow bigger. “Systemic risk exceptions” are also being used to guarantee banks’ uninsured deposits, and some propose blanket deposit guarantees. However, the fear is that the situation could spiral out of control, and traditional policies may be overlooked in an attempt to resolve the crisis.

Short-selling of Bank Stocks: Controversy and Debate

Short-selling of bank stocks is also a hotly debated topic. The strategy involves borrowing shares with the expectation that prices will drop. Investors then buy back the shares for a profit. The SEC temporarily banned short sales in 2008, but regulatory intervention could be even more controversial this time.

The Case for a Ban: Economic Uncertainty and Fear of Bank Runs

Given the current economic uncertainty and falling commercial real estate values, some argue for a short-selling ban. Critics claim that stock plunges can spook depositors and prompt bank runs. JPMorgan CEO Jamie Dimon has also called for regulators to consider banning the short-selling of bank stocks.

Leaving Things in Place? Arguments Against Short-Selling Bans

On the other hand, others argue that a ban would negatively impact market quality and stability. The 2008 short-selling ban only lasted three weeks and was deemed unnecessary and harmful by some. The ban’s impact on liquidity and pricing efficiency is also a concern. Short-sellers can use other instruments to circumvent the ban, and some contend that short-selling is necessary to bring attention to companies that require more scrutiny. Goldman Sachs economists have also argued that such a drastic move on bank shares is unlikely in the current scenario.

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