MAY 2 (Reuters) – US federal and state officials are studying the possibility of “market manipulation” behind large price moves in bank stocks in recent days, a source familiar with the matter said on Thursday, as the White House vowed to “short-selling pressures on healthy banks.”
Regional bank shares continued their slide this week after the collapse of First Republic Bank, the third mid-sized US lender to fail in two months. On Thursday alone, short sellers made $378.9 million in paper profits betting against certain regional banks, according to analytics firm Ortex.
Elevated shorting activity and volatility in stocks have prompted increased scrutiny from federal and state officials and regulators in recent days amid strong sector fundamentals and ample capitalization, said the source, who was not authorized to speak publicly.
“State and federal regulators and officials are becoming increasingly alert to the possibility of market manipulation related to bank stocks,” the source said.
White House press secretary Karine Jean-Pierre said the Biden administration is closely monitoring the situation.
“The government will closely monitor market developments, including short selling pressures on healthy banks. I would have to refer you to the SEC for possible action,” Jean-Pierre said at a White House briefing.
SEC Chairman Gary Gensler said Thursday the agency would investigate any wrongdoing that could threaten investors or markets.
“As I said earlier, during times of heightened volatility and uncertainty, the SEC has a particular focus on identifying and prosecuting any form of wrongdoing that could jeopardize investors, capital formation or the broader markets,” he said in a written statement .
The S&P 600 banking index (.SPSMCBKS) fell over 3% on Thursday. PacWest Bancorp (PACW.O) shares plunged over 50% after the company confirmed it was reviewing strategic options.
Western Alliance Bancorp (WAL.N) dismissed a Financial Times report saying it was evaluating a possible sale and reviewing legal options. Its shares plunged more than 38%, with the stock halting trading on multiple occasions.
The volatility in stock prices did not reflect the fact that many regional banks outperformed in first-quarter earnings and had solid fundamentals, including stable deposits, ample capital and reduced uninsured deposits, the source said.
“This week we have seen that regional banks remain well capitalized,” the source said.
Short selling, where investors sell securities they have borrowed and try to buy them back at a lower price to make up the difference, is not illegal and is considered part of a healthy market. But stock price manipulation, which the SEC has defined as “willful or intentional conduct designed to mislead or defraud investors by controlling or artificially influencing stock prices,” it is.
The increased short-selling activity has sparked some calls for a temporary ban, but an SEC official told Reuters on Wednesday the agency was “not currently considering” such a move.
The SEC first warned investors in March, during an earlier period of high market volatility related to the collapse of Silicon Valley Bank and Signature Bank, that it would closely monitor market stability and prosecute any wrongdoing.
Edited by Kieran Murray and Chizu Nomiyama
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