As the United States faces a growing banking crisis, marked by the recent collapse of several banks, analysts at JP Morgan suggest that US regulators may target short-selling practices to prevent further contagion. Industry insiders have accused short sellers of fueling panic by implying that the crisis will engulf even more banks. That has prompted JP Morgan analysts to consider the possibility of regulators temporarily halting short-selling activities.
Understanding Short Selling: A Controversial Investment Strategy
Short selling is an investment strategy that aims to profit from the falling price of a security. Amid the current banking crisis, short sellers have been scrutinized for their potential to manipulate the market and exacerbate panic among investors and the general public.
On May 4, the American Banker Association (ABA) penned a letter to the US Securities and Exchange Commission (SEC), expressing concerns about potential market manipulation by short sellers. In addition, Naomi Camper, ABA’s Chief Policy Officer, observed that some share trading activities seem to defy the underlying fundamentals, further fueling suspicions of manipulation.
In their note, JP Morgan analysts echoed the ABA’s concerns, stating that they had never witnessed a “perfectly healthy bank” fall into the hands of the Federal Deposit Insurance Corporation (FDIC) within such a short time. In addition, the analysts pointed out that even banks with robust financial standing have been affected by the pressure created by short sellers, as more Americans increasingly worry about the safety of their deposits.
Impact on Regional Banks and Short Sellers’ Profits
The market panic generated by short sellers has led to considerable price swings in the shares of several regional banks, such as Pacific Western in Los Angeles and First Horizon in Tennessee. Over the past two months, these banks have experienced a significant decline in share value.
Despite the collapse of three major regional banks holding $532 billion in deposits, short sellers seem to be reaping substantial profits. Data firm Ortex reported that short sellers had made $1.2 billion by betting against struggling stocks. On May 4 alone, short sellers reportedly earned $379 million by shorting First Horizon, PacWest, and Western Alliance shares.
Interestingly, public polling firm Ipsos found that most Americans trust their banks. According to their survey, the majority of respondents expressed a fair amount or a great deal of confidence in the stability of their bank and the safety of their deposits.
The Future of Short Selling Regulation
As the United States grapples with an escalating banking crisis, short selling has become a significant concern for regulators and industry insiders.
While it remains to be seen whether the US Securities and Exchange Commission will take action against short-selling practices, the possibility of temporary intervention looms large.
As the situation unfolds, all eyes will be on the regulatory response to this controversial investment strategy and its impact on the fragile banking sector.
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