© Reuters. FILE PHOTO: Seal of the U.S. Securities and Exchange Commission (SEC) at its headquarters in Washington, D.C., U.S., May 12, 2021. Photo taken May 12, 2021. (Reuters)/Andrew Kelly/File Photo
Written by Andrea Shalal
WASHINGTON (Reuters) – The American Bankers Association on Thursday urged federal regulators to investigate a massive short-selling of publicly traded bank shares that it said was “detached from fundamental financial realities.”
In a letter to SEC Chairman Gary Gensler, the lobby group said it also noted “widespread sharing on social media” about the health of various banks that was inconsistent with general conditions of the industry.
“We urge the Securities and Exchange Commission to consider all of its existing tools and take measures to reduce avenues for abusive business practices and restore investor confidence,” the group said.
“These actions include, at a minimum, a clear message and appropriate enforcement action against market manipulation and other abusive short selling practices.”
The ABA call came as regional bank shares resumed their decline this week after a crash First Republic Bank (OTC:), the third medium-sized US bank to fail in two months.
Short sellers took in $378.9 million in paper profits Thursday alone from betting against some regional banks, according to analytics firm Ortex.
Reuters reported earlier that US federal and state officials are assessing the possibility of “market manipulation” behind the large moves in bank stock prices in recent days, with the White House vowing to monitor “shorting pressure on healthy banks.”
ABA President and CEO Rob Nichols told Gensler that short selling can be a legitimate financial instrument, but that his group was “categorically opposed to short selling practices that distort markets through manipulation and abuse.”
Gensler called for sending a clear message to market players and taking appropriate enforcement action against market manipulation and other abusive short selling practices.
“The damage from short selling that goes against economic fundamentals ultimately falls on small investors, who see value destroyed by the aggressive behavior of others,” he said.
The ABA covers small, regional and large banks that together employ more than 2 million people, protect $19.2 trillion in deposits and make $12.2 trillion in loans.
The bank’s S&P 600 index fell more than 3% on Thursday. Shares of PacWest Bancorp fell more than 50% after it confirmed it was exploring strategic options.
Western Alliance (NYSE: Bancorp) fell more than 38% after the Financial Times said the bank was exploring a possible sale, a report the bank later denied.
Given the potential for harm to investors and the “perceived health of banks” targeted by short sellers, Nichols writes, the SEC should strengthen its efforts and public visibility to counter abusive and market-distorting short campaigns.
Gensler said Thursday that the agency will pursue any form of misconduct that threatens investors or markets.