Regional-Bank Shares Dive as Investors Fret About Contagion
Wall Street JournalMay 04, 2023
US federal and state officials are reportedly analyzing whether a possible "market manipulation" was behind the recent volatility in regional banking shares, as the White House vowed to monitor "short-selling pressures on healthy banks."
This comes as the American Bankers Association urged the Securities and Exchange Commission (SEC) to take action against the alleged "abusive" trading practices against otherwise healthy banks.
It is certain that bearish short sellers have been betting against regional bankers despite the Fed reaffirming that the US banking system is sound and resilient, but this does not tell the entire story. Some investors are fearing the contagion of regional banking problems and its possible spillover to the broader economy, while others may be seeking to force the Fed to ease its campaign to cool inflation down. The finance marketplace is adjusting to broader complexities.
Short sellers do play a crucial role in rational, well-functioning markets. However, because these investors have pocketed billions of dollars in two months by betting against regional banks that added deposits in April, it should be clear by now that this is no longer a well-functioning financial market. A temporary ban on short selling, similar to the one adopted in 2008, should be put in place to reduce panic selling.
There's a 10% chance that there will be a US financial crisis before July 1, 2023, according to the Metaculus prediction community.