May 4 (Reuters) – U.S. federal and state officials are assessing whether “market manipulation” caused recent volatility in banking shares, a source familiar with the matter said on Thursday, as the White House promised to monitor “short-selling pressures on healthy banks.”
Shares of regional banks continued their slide this week after the collapse of First Republic Bank, the third US mid-sized lender to fail in two months. Short sellers took in $378.9 million in paper profits on Thursday alone from betting against several regional banks, according to analytics firm Ortex.
Increased short-selling activity and volatility in shares has led to increased scrutiny by federal and state officials and regulators in recent days, given the sector’s strong fundamentals and adequate capital levels, said the source, who was not authorized to speak publicly.
“State and federal regulators and officials are becoming increasingly attentive to the possibility of market manipulation regarding banking equities,” the source said.
White House press secretary Karine Jean-Pierre said the Biden administration is closely monitoring the situation, but any possible action will be taken by the Securities and Exchange Commission.
“The administration will closely monitor market developments, including short-selling pressures on healthy banks,” Jean-Pierre told a White House briefing.
The American Bankers Association on Thursday called on the SEC to investigate significant short sales of banking shares and social media engagement that it said appeared to be “disconnected from underlying financial realities.”
“We encourage the SEC to consider all of its existing tools and take steps to reduce avenues for abusive trading practices and restore investor confidence,” the group said.
SEC Chair Gary Gensler said Thursday that the agency will pursue any type of misconduct that could threaten investors or markets.
“As I said, in times of increased volatility and uncertainty, the SEC is particularly focused on identifying and prosecuting any type of misconduct that could threaten investors, capital formation, or to markets more broadly,” he said in a written statement.
Consumer Bankers Association President and CEO Lindsey Johnson emphasized that the banking industry remains strong and urged policymakers to call out “unethical behavior by activist investors” who are taking advantage of market volatility .
“This volatility is fueled by sentiment and misinformation that does not reflect the strong fundamentals of our banks,” Johnson said in a statement.
“These institutions remain strong and well capitalized, and Americans can rest assured that their deposits are safe.”
The S&P 600 bank index (.SPSMCBKS) fell more than 3% on Thursday. PacWest Bancorp shares (PACW.O) fell more than 50% after it confirmed it was exploring strategic options.
Western Alliance Bancorp ( WAL.N ) denied a report from the Financial Times that said it was exploring a potential sale, saying it was exploring legal options. Its shares fell more than 38%, with trading in the stock halted multiple times.
The changes in the share price do not reflect the fact that many regional banks exceeded first-quarter earnings and have good fundamentals, including stable deposits, adequate capital, and reduced uninsured deposits. , the source said.
The source did not provide details on the specific cases that have drawn 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 specific activity in the marketplace. But it said it is focused on “identifying, stopping, and correcting any unlawful practices in our markets” that violate state law.
Short selling, where investors sell borrowed securities and seek 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, defined by the SEC as “intentional or intentional conduct designed to deceive or defraud investors by controlling or artificially affecting” stock prices, is illegal.
The increased short-selling activity has triggered calls for a temporary ban, but an SEC official said Wednesday that 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 would carefully monitor market stability and prosecute any type of misconduct.
Edited by Kieran Murray and Chizu Nomiyama
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