On Thursday, a source claimed U.S. federal and state officials are investigating whether “market manipulation” caused the recent volatility in banking shares, while the White House pledged to monitor “short-selling pressures on healthy banks.”
After First Republic Bank failed, regional bank shares fell again this week. According to Ortex, short sellers made $378.9 million betting on regional banks on Thursday.
Given strong sector fundamentals and sufficient capital levels, federal and state officials and regulators have been scrutinizing short-selling activity and share volatility in recent days, said the source, who was not authorized to speak publicly.
“State and federal regulators and officials are increasingly attentive to the possibility of market manipulation regarding banking equities,” the person added.
White House press secretary Karine Jean-Pierre said the Biden administration was monitoring the issue, but the Securities and Exchange Commission will act.
“The administration is going to closely monitor the market developments, including the short-selling pressures on healthy banks,” Jean-Pierre told a White House briefing.
On Thursday, the American Bankers Association asked the SEC to investigate substantial short sells of banking shares and social media involvement that looked “disconnected from the underlying financial realities.”
“We urge the SEC to consider all its existing tools and take measures to reduce avenues for abusive trading practices and restore investor confidence,” the organization stated.
SEC Chair Gary Gensler said Thursday the agency will prosecute misbehavior that harms investors or markets.
“As I’ve said, in times of increased volatility and uncertainty, the SEC is particularly focused on identifying and prosecuting any form of misconduct that might threaten investors, capital formation, or the markets more broadly,” he said.
Consumer Bankers Association President and CEO Lindsey Johnson said the banking industry was robust and asked authorities to call out “unethical behavior by activist investors” taking advantage of market turbulence.
“This volatility is being fueled by emotion and misinformation that does not reflect the strong underlying fundamentals of our banks,” Johnson added.
“These institutions remain resilient and well-capitalized, and Americans can rest assured their deposits are safe.”
Thursday’s S&P 600 bank index (.SPSMCBKS) fell almost 3%. After announcing strategic alternatives, PacWest Bancorp (PACW.O) shares fell over 50%.
Western Alliance Bancorp (WAL.N) rejected a Financial Times story that it was considering selling and said it was examining legal alternatives. Its stock fell over 38% and was halted multiple times.
The source claimed share price movements did not reflect the reality that many regional banks outperformed on first quarter results and had good fundamentals, including steady deposits, sufficient capital, and decreasing uninsured deposits.
The source does not specify federal or state regulator-targeted instances.
The California Department of Financial Protection and Innovation declined to comment on investigations or market activity. It stated it was “identifying, stopping, and remedying any unlawful practices in our markets” that contravene state law.
Short selling, in which investors sell borrowed securities and purchase them back at a reduced price to profit, is legal and beneficial for the market. “Intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting” stock prices is prohibited, according to the SEC.
On Wednesday, an SEC spokesman said the agency was “not currently contemplating” a short-selling prohibition.
In March, during heightened market volatility after Silicon Valley Bank and Signature Bank collapsed, the SEC reminded investors that it was actively monitoring market stability and would pursue any fraud.