ABA wants SEC to probe short sales

The American Bankers Association has called on US federal regulators to investigate what it has described as significant short selling of publicly traded banking equities, which it claims are “disconnected from the underlying financial realities”. The lobby group has also noticed “extensive social media engagement” about the health of banks, which is out of sync with industry conditions. Short selling is a legitimate financial tool, but the ABA claims it is “unalterably opposed” to short selling practices that distort the markets through manipulation and abuse.

The call comes as shares of regional banks have continued to fall following the collapse of First Republic Bank, the third mid-sized US lender to fail in two months. Short sellers were said to have made $378.9m in paper profits from betting against specific regional banks in one day alone, according to analytics firm Ortex. Federal and state officials are now examining the possibility of “market manipulation” behind large moves in banking share prices.

ABA President and CEO Rob Nichols urged US Securities and Exchange Commission Chair Gary Gensler to take action against market manipulation and other abusive short selling practices. Nichols called on Gensler to reinforce and publicly highlight the agency’s efforts to address abusive, market-distorting short campaigns. Short selling that runs counter to economic fundamentals ultimately falls on small investors, who see value destroyed by others’ predatory behaviour, Nichols said.

The ABA includes small, regional and large banks that together employ over two million people, safeguard $19.2tn in deposits and extend $12.2tn in loans. Meanwhile, the S&P 600 bank index has fallen by over 3% and PacWest Bancorp shares dropped more than 50% after it confirmed it was exploring strategic options. Western Alliance Bancorp saw its share price plunge over 38% after reports emerged that the bank was exploring a possible sale.