Though regional banks' stock prices recovered somewhat on Friday,
There are several ideas bank industry insiders have floated as potential ways to stem the bearish tide that regained strength after
These include short-term steps such as stepping up enforcement of market manipulation rules and enacting a temporary ban on short selling, as was done during the 2008 crisis.
The ideas also include much larger proposals, such as guaranteeing deposits in non-interest-bearing transaction accounts, another step taken in 2008, or providing liquidity sources that would allow commercial real estate loans for office space to be refinanced.
Underlying those potential approaches is a belief that short selling is merely a symptom of a bigger problem: a lack of confidence in regional banks.
"Let's think about the reasons why short sellers have emerged in the banking space and try to identify two or three reasons why they're going after bank stocks," said Terry McEvoy, a bank analyst at Stephens Research. "Let's not just focus on short sellers, but the reasons why they've emerged and provide a policy response to address that."
The attention on short sellers — nearly two months into a banking crisis that many hoped would end with JPMorgan playing the white knight role for First Republic — reflected frustration over a seeming disconnect between many banks' market valuations and the traditional ways of determining what they are worth.
Short sellers borrow stock and immediately sell it, on the belief that the shares will fall in price. If that happens, the short seller then purchases the shares at a lower price and makes a profit.
"In recent weeks, there has been an unusually high degree of uncertainty by investors or analysts who are experts in the banking industry in explaining the dislocation of bank stock valuation relative to recently reported bank fundamentals," said James Abbott, director of investor relations at Zions Bancorp., one of the regional banks that saw its stock price fall last week.
Here is a look at what's driving the focus on short sellers, how the industry is responding to their apparent efforts to push down bank stock prices and some of the ideas for government intervention that are now emerging.
What happened last week
After JPMorgan bought First Republic out of receivership, the share prices of other midsize banks
At Phoenix-based Western Alliance Bancorp., the stock price was down 28% for the week, even after it rose 49% on Friday. The decline was even bigger at PacWest Bancorp in Los Angeles — 43% for the week despite an 82% increase on Friday.
Other banks that recorded double-digit stock price declines for the week included Dallas-based Comerica, which was down 16%, Zions, which fell by nearly 15%, and Cleveland-based KeyCorp, which declined by 12%.
The KBW Nasdaq Bank Index, an industry benchmark, fell by 7.6% over the week.
The price declines were likely driven not only by short sellers, but also by investors who are rethinking their long exposure to regional banks in light of emerging concerns about the sector's future earnings outlook, the credit quality pictuer and fears about deposit runs.
"We are likely seeing two things in this week's stock action: The first is a healthy reevaluation by analysts of the earnings power of midsized commercial banks, particularly those with commercial real estate exposure and large business lending and deposit portfolios," said Todd Baker, a senior fellow at the Richman Center for Business, Law & Public Policy at Columbia University.
"The second is a cynical attack by short sellers on those same banks with the goal of generating headlines to reduce customer confidence and worsen the banks' funding problems," added Baker, who is also the managing principal of Broadmoor Consulting. "This then creates continued downward pressure on the stock, and the short sellers benefit."
Still, banks and industry groups focused their attention on short sellers, saying they were manipulating the market by seeking to drive spooked depositors to withdraw their cash from banks, even those that recently published quarterly earnings reports affirming their health.
Western Alliance, which
After the Financial Times reported that Western Alliance was exploring a sale, the Phoenix bank said Thursday that the story was "categorically false" and accused short sellers of spreading a false narrative.
"It's clear that short sellers have launched a campaign to manipulate the media and the market," Dale Gibbons, Western Alliance's vice chairman and chief financial officer, said in an email Friday.
"It's a cynical ploy designed to capitalize on misinformation and create public anxiety so they can make a quick buck at the expense of more responsible long-term investors and shareholders," Gibbons said. "Despite all this noise, we continue to keep our eyes on what matters most: delivering trusted banking services to our customers."
The American Bankers Association and other industry groups asked the Securities and Exchange Commission to investigate the behavior of short sellers.
Short selling is legal, but market manipulation, which involves intentional conduct aimed at deceiving investors by artificially affecting stock prices, is not.
"Since the two bank failures in March, some of our members have experienced significant short sales of their publicly traded equity securities that do not appear to reflect the issuers' financial status or general industry conditions — indeed, short sales have followed relatively favorable earnings reports from some of the banks in question and from peer institutions," ABA CEO Rob Nichols
"We have also observed extensive social media engagement about the health of various banks and the sector generally that appears disconnected from the underlying financial realities," Nichols added. "We urge the SEC to investigate this behavior."
The Consumer Bankers Association also issued a statement, urging policymakers to call out what it called "unethical behavior."
"Market participants and policymakers should take a serious look at the role short sellers are playing in the market and their impact on Americans' confidence in our financial system," Lindsay Johnson, the trade group's CEO, said in the statement.
Bank industry lobbyists engaged with SEC officials, along with officials from the Treasury Department, a person familiar with those discussions said. The industry wanted the Biden administration and its regulators to condemn short sellers, the person said.
Another person familiar with the discussions said the industry was most interested in the SEC using its bully pulpit — rather than take a more concrete step like halting short selling on financial stock trades — to let short sellers know that there is a cop on the block.
On Thursday, both the White House and the SEC issued statements that seemed aimed at reassuring markets.
White House Press Secretary Karine Jean-Pierre said that the Biden administration was closely monitoring the short-selling pressures on healthy banks.
And SEC Chairman Gary Gensler said that the agency is "particularly focused on identifying and prosecuting any form of misconduct that might threaten investors, capital formation, or the markets more broadly."
The Independent Community Bankers of America, a trade group that represents smaller banks, commended Gensler's statement.
"To support the continued health and safety of the financial markets, ICBA strongly opposes short selling that is solely designed to manipulate bank stocks and cause harm to otherwise healthy financial institutions," ICBA CEO Rebeca Romero Rainey said in a statement.
What could happen next
The SEC has at least one powerful tool it could deploy in the short term, although using it would likely be controversial. In 2008, the SEC took temporary emergency action to prohibit short selling in financial companies.
That move has been debated, but the most recent academic research suggests that it wasn't very effective, said Baker.
"That's probably why the SEC is focused on specific manipulative activities in the markets for regional banks rather than short selling as a practice," Baker said.
The SEC is not currently contemplating the idea of a temporary ban on short selling, according to two sources familiar with the matter.
Other ideas for how to restore confidence in the sector have less to do with short selling specifically.
Underlying those proposals is a belief that rock-bottom share prices could spark large deposit outflows, undermining the health of otherwise solid banks.
At the top of the list, according to Autonomous Research analyst Brian Foran, is the implementation of a transaction-account guarantee, a tool that would guarantee all non-interest bearing-transaction accounts.
The guarantee isn't a new concept. It was put into place during the 2008 crisis as one leg of the Temporary Liquidity Guarantee Program, which also included a debt-guarantee program, Foran noted.
In a report this week, the Federal Deposit Insurance Corp. suggested that "targeted account coverage" could cover business transaction accounts and be
"It's the obvious solution if we have deposit flight and nervous depositors who don't know if their bank is safe and they're pulling out deposits," Foran said in an interview. "Investors want it, banks want it, the FDIC wants it. The only thing stopping it is the need for congressional approval."
In a research note Thursday, Foran floated several other ideas, including the creation of a Federal Reserve lending facility that would allow banks to provide inexpensive three- to four-year funding to commercial real estate borrowers.
"Everyone is convinced CRE is the next shoe to drop," Foran wrote. "So get ahead of this problem."
On Friday, equity analysts at JPMorgan Chase wrote that while they have been bearish on small-cap and mid-cap banks, they are now moving to a more neutral position.
The JPMorgan analysts wrote that they foresee a changing landscape, including the possibility of changes to FDIC deposit insurance levels, adding that "we think enough pressure is building that with every passing day it gets more likely that some form of relief will be provided to the sector."
Mike Mayo, an analyst at Wells Fargo Securities, offered a similar message of caution to short sellers.
"The government has many tools in its toolkit, including a bazooka they can use in a variety of ways and in ways we haven't even imagined yet," he said.
