May 4 (Reuters) – U.S. federal and state officials are assessing whether “market manipulation” caused the recent volatility in bank stocks, a source familiar with the matter said Thursday, as the White House vowed to monitor “healthy short-selling pressures.” . banks.”
Regional bank stocks resumed their decline this week after the collapse of First Republic Bank, 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.
The source, who was not authorized to speak publicly, said increased short-selling activity and volatility in stocks has led to increased scrutiny from federal and state officials and regulators in recent days, given the sector’s strong fundamentals and adequate capital levels.
“State and federal regulators and officials are increasingly concerned about the potential for market manipulation in relation to bank stocks,” the source said.
The White House press secretary, Karen Jean-Pierre, said the Biden administration was watching the situation closely, but any potential action would be taken by the SEC.
“The administration will closely monitor market developments, including shorting pressures on healthy banks,” Jean-Pierre said in a White House briefing.
The American Bankers Association on Thursday called on the Securities and Exchange Commission to investigate significant short selling of banking stocks and social media interactions that it said appeared to be “disconnected from basic financial realities.”
“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.
SEC Chairman Gary Gensler said Thursday that the agency will prosecute any form of misconduct that could threaten investors or the markets.
“As I have said, in times of heightened volatility and uncertainty, the SEC is especially focused on identifying and prosecuting any form of misconduct that could threaten investors, capital formation, or markets more broadly,” he said in a written statement.
Consumer Bankers Association President and CEO Lindsey Johnson stressed that the banking industry remains strong and urged policymakers to call out “unethical behavior by activist investors” who exploit market volatility.
“This volatility is fueled by emotion and misinformation, which does not reflect the strong fundamentals of our banks,” Johnson said in a statement.
“These institutions remain resilient and well-capitalized, and Americans can rest assured that their deposits are safe.”
The S&P 600 (.SPSMCBKS) Bank Index fell more than 3% on Thursday. Shares of PacWest Bancorp (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 it was exploring a potential sale, and said it was exploring legal options. Its shares fell by more than 38%, with trading in the stock halted several times.
The source said the stock price fluctuations did not reflect the fact that many regional banks outperformed first-quarter earnings and had sound fundamentals, including stable deposits, adequate capital and low unsecured deposits.
The source did not give details of specific cases that had come to the attention of federal or state regulators.
The California Department of Financial Protection and Innovation said it could not confirm investigations or whether it was aware of any specific market activity. But it said it was focused on “identifying, stopping, and addressing any illegal practices in our markets” that violate state law.
Short selling, where investors sell borrowed securities with the intention of buying 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, which the SEC defines as “willful or willful conduct designed to deceive or defraud investors by artificially controlling or influencing ‘stock prices’, is illegal.”
The short-selling activity has prompted 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 and Signature Bank, that it was carefully watching market stability and would prosecute any form of misconduct.
Edited by Kieran Murray and Chizu Nomiyama
Our standards: Thomson Reuters Trust Principles.