Regional
Shares of embattled regional banks were rebounding Friday, but ongoing uncertainty in the sector has led to growing calls for the federal government to take action to restore investor and depositor confidence in these institutions.
The American Bankers Association, a trade group, sent a letter dated Thursday to Securities and Exchange Commission Chairman Gary Gensler asking him to use emergency powers to institute a ban on short sales of bank stocks, while others are calling on bank regulators to take emergency steps of their own.
Without authorization from Congress, federal agencies are constrained in their ability to help, but federal laws still grant them extensive emergency powers if the situation deteriorates. Following are some possible actions.
A ban on short selling
The SEC has the authority to temporarily block short sales of stocks, a power it has used intermittently, usually in a targeted fashion to address potential manipulation in a single stock.
A short sale is a means of betting that a stock will decline in price. A market participant will borrow a stock in order to sell it on the open market, hoping to be able to repurchase that stock at a lower price and return it to the lender, earning the difference between the two prices.
The SEC last used the authority to ban short sales in an entire class of stocks in the fall of 2008 as financial-sector equities were crashing following the bankruptcy of the investment bank Lehman Brothers.
U.S. regulators, however, have soured on short sale bans as an effective strategy for preventing market panic. Former SEC Chairman Jay Clayton declined to use it during the COVID panic in 2020, even as many foreign jurisdictions enacted short sale bans of their own.
Research by the Federal Reserve has shown that the 2008 ban had little impact on stock price but did increase trading costs, and former SEC Chairman Christopher Cox, who implemented the ban, quickly came to regret it.
A blanket short sale ban by the SEC is unlikely, but that doesn't mean the agency couldn't bring enforcement cases against traders if they are aggressively selling short bank stocks while also engaging in other manipulative practices that could be adding to uncertainty around regional bank stocks KRE, +4.96%.
Gensler said in a statement Thursday that "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."
Securities-law expert Joshua Mitts at Columbia Law School recently published research showing that some market participants are engaging in a strategy of driving a stock price down through short sales and pseudonymous attacks on a company in online articles and social media.
This is followed by a "sharp reversal" in the direction of their trading as manipulators attempt to profit from a rebound in stock prices.
Expanded deposit insurance
Following the failures of Silicon Valley Bank, Signature Bank and First Republic Bank, stresses elsewhere in the regional bank ecosystem appear to be centered around squeamish equity investors rather than depositors, which may be driven by policymakers in Washington stressing that recent bank rescues have left bank owners holding the bag, according to Raymond James analyst Ed Mills.
"The continued refrain about wiping out equity holders — while good politics — is arguably causing a vicious cycle at regional banks and causing a vicious cycle at regional banks that is causing more panic than necessary," he wrote in a recent note to clients.
PacWest Bancorp PACW, +8.11% and Western Alliance WAL, +6.09%, two regional banks whose stocks have experience volatility this week have said publicly that their deposit base remains stable, with high levels of insured deposits compared to recently failed counterparts.
Their stocks have been on the rise Friday along with Zions Bancorp ZION, +4.87%, and Metropolitan Bank Holding Group MCB, +7.73%.
That said, each of these stocks is down more than 50% year-to-date, according to FactSet, and there are no assurances that the volatility is over.
If equity market stress does ultimately encourage depositors to pull their money in favor of a bank perceived as more stable, regulators may have to step in to prevent further runs.
This could include invoking a "systemic risk exception" that enables the FDIC to expand deposit insurance to protect uninsured depositors, like it did in the cases of SVB and Signature.
Ian Katz, a financial policy analyst at Capital Alpha Partners, is skeptical that regulators are close to such a move, given that using the systemic risk exception for SVB and Signature "raised eyebrows" and would require a two-thirds vote of both the Federal Reserve and FDIC boards.
"The question regulators will want to know is how many deposits fled regional banks like PacWest and Western Alliance on Thursday as their stocks were getting pummeled," he wrote in a Thursday note. "We don't think the regulators are very motivated by stock prices. They will be looking at deposits."
A new Fed facility
If regional banks are hit with another wave of deposit flight, the Fed could look to set up a new lending facility in partnership with the Treasury, as was done in March with the Bank Term Funding Program, which allowed banks to borrow against their holdings of government and mortgage debt at very favorable terms.
Data released by the Federal Reserve Thursday shows, however, that following the distressed sale of First Republic to JPMorgan Chase JPM, +0.18%, take-up of Fed lending programs actually fell in the seven days ending May 3, indicating that bank funding needs are not a source of stress.
A new program would therefore do little to calm equity market stress, Katz said. "If it's a different name with the same general idea — flexible lending terms for banks — investors will see right through it," he wrote.
Meadows, the fourth and final White House chief of staff during Donald Trump's four-year presidency, has testified before the federal grand jury reviewing evidence in two special-counsel investigations into the former president, the New York Times reported and ABC News corroborated.
A ban on short selling Expanded deposit insurance A new Fed facility