Exclusive: US officials consider possible ‘manipulation’ of bank stocks -source

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 on Thursday, as the White House vowed to monitor the “short-selling pressure on ‘healthy’ banks.”

Shares in regional banks resumed their slide this week following the collapse of First Republic Bank, the third mid-sized US lender to fail in two months. Short sellers raked in $378.9 million in paper profits on Thursday alone from betting against certain regional banks, according to research firm Ortex.

Increased short-selling activity and volatility in stocks have drawn increasing scrutiny from federal and state officials and regulators in recent days, given strong fundamentals in the sector and adequate capital levels, said the source, who was not authorized to speak publicly.

“State and federal regulators and officials are increasingly aware of the possibility of market manipulation regarding bank stocks,” the source said.

White House press secretary Karine Jean-Pierre said the Biden administration was closely monitoring the situation, but any possible action would be taken by the Securities and Exchange Commission.

“The administration is going to be watching market developments closely, including the short-selling pressure on healthy banks,” Jean-Pierre told a White House briefing.

The American Bankers Association on Thursday called on the SEC to investigate significant short selling of bank stocks and social media engagement that it said was “disconnected from the underlying economic realities.”

“We urge the SEC to review all of its existing tools and take action to reduce opportunities for abusive trading practices and restore investor confidence,” the group said.

SEC Chairman Gary Gensler said Thursday that the agency would go after any type of misconduct that could threaten investors or markets.

“As I have said, in times of heightened volatility and uncertainty, the SEC is particularly focused on identifying and prosecuting any type of misconduct that could threaten investors, capital formation or the markets more generally,” he said in a written statement.

Consumer Bankers Association President and CEO Lindsey Johnson emphasized that the banking industry remained strong and urged policymakers to call out “unethical behavior by activist investors” who took advantage of market volatility.

“This volatility is being driven by emotion and misinformation that does not reflect the strong underlying fundamentals of our banks,” Johnson said in a statement.

“These institutions remain robust and well-capitalized, and Americans can rest assured that their deposits are safe.”

The S&P 600 banking index (.SPSMCBKS) fell more than 3% on Thursday. PacWest Bancorp ( PACW.O ) shares fell more than 50% after it confirmed it was exploring strategic options.

Western Alliance Bancorp ( WAL.N ) denied a Financial Times report saying it was exploring a potential sale, saying it was exploring legal options. Shares fell more than 38%, and trading in the stock was halted several times.

Share price swings did not reflect the fact that many regional banks outperformed first-quarter earnings and had good fundamentals, including stable deposits, adequate capital and reduced uninsured deposits, the source said.

The source did not provide details on specific cases that had drawn 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 particular market activity. But it said it was focused on “identifying, stopping and remedying any illegal practices in our markets” that violate state laws.

Short selling, where investors sell borrowed securities and aim to buy them back at a lower price to make up the difference, is not illegal and is considered part of a healthy market. But manipulating stock prices, which the SEC defines as “willful or intentional conduct designed to deceive or defraud investors by controlling or artificially influencing” stock prices, is illegal.

The increased short-selling activity has sparked 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 was closely monitoring market stability and would prosecute any misconduct.

Edited by Kieran Murray and Chizu Nomiyama

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