May 4 (Reuters) – U.S. federal and state officials are weighing whether “market manipulation” has caused the recent volatility in bank stocks, a source familiar with the matter said on Thursday, as the White House pledged to monitor ” short-selling pressures in healthy markets”. banks.”
Shares of regional banks resumed their slide this week after the collapse of First Republic Bank, the third mid-sized US lender to fail in two months. Short sellers raked in $378.9 million in paper profits on Thursday alone by betting against some regional banks, according to analyst firm Ortex.
Rising short-selling activity and equity volatility have drawn increasing attention from federal and state authorities and regulators in recent days, given the sector’s strong fundamentals and sufficient capital levels, said the source, who was not authorized to speak publicly.
“Regulators and state and federal officials are increasingly alert to the possibility of market manipulation regarding bank stocks,” the source said.
White House press secretary Karine Jean-Pierre said the Biden administration was monitoring the situation closely, but any action would be taken by the Securities and Exchange Commission.
“The administration will closely monitor market developments, including short-selling pressures on sound banks,” Jean-Pierre said during a White House press briefing.
The American Bankers Association on Thursday called on the SEC to investigate significant shorting of bank stocks and social media engagement that it said appeared “disconnected from underlying financial realities.”
“We urge the SEC to review all of its existing tools and take action to reduce opportunities for abusive trading practices and restore investor confidence,” the group said.
SEC Chairman Gary Gensler said Thursday that the agency will pursue any form of misconduct that could threaten investors or markets.
“As I said, in times of heightened volatility and uncertainty, the SEC is particularly focused on identifying and prosecuting any form of misconduct that could threaten investors, capital formation, or markets more widely,” he said in a written statement.
Consumer Bankers Association President and CEO Lindsey Johnson stressed that the banking industry remains strong and urged policymakers to call out “the unethical behavior of activist investors” who were profiting from market volatility. market.
“This volatility is fueled by emotion and misinformation that does not reflect the strong underlying fundamentals of our banks,” Johnson said in a statement.
“These institutions remain resilient and well capitalized, and Americans can be assured that their deposits are safe.”
The S&P 600 banking index (.SPSMCBKS) fell more than 3% on Thursday. Shares of PacWest Bancorp (PACW.O) fell more than 50% after confirming it was exploring strategic options.
Western Alliance Bancorp (WAL.N) denied a Financial Times report that it was considering a potential sale and said it was exploring legal options. Its shares fell more than 38% as trading in the stock halted several times.
The stock price swings did not reflect the fact that many regional banks outperformed on first-quarter earnings and had strong fundamentals, including stable deposits, sufficient capital and a decline in uninsured deposits, said The source.
The source gave no details on specific cases that had come to the attention of federal or state regulators.
The California Department of Financial Protection and Innovation said it could not confirm the investigations or whether it was aware of any particular market activity. But he said he is focused on “identifying, stopping and correcting all illegal practices in our markets” that violate state law.
Short selling, in which investors sell borrowed securities and aim to buy them back at a lower price to pocket the difference, is not illegal and is considered part of a healthy market. But stock price manipulation, which the SEC defines as “intentional or deliberate behavior intended to deceive or defraud investors by artificially controlling or affecting” stock prices, is illegal.
The increased short-selling activity has sparked calls for a temporary ban, but an SEC official said Wednesday the agency is “not currently considering” such a move.
The SEC first warned investors in March, during a period of high market volatility surrounding the collapse of Silicon Valley Bank and Signature Bank, that it was carefully monitoring market stability and would pursue any form of misconduct.
Edited by Kieran Murray and Chizu Nomiyama
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