EXCLUSIVE: US officials assess possible ‘manipulation’-source in bank stocks

May 4 (Reuters) – U.S. federal and state officials are assessing whether “market manipulation” caused recent volatility in bank stocks, a source familiar with the matter said on Thursday, as the White House “pledged to monitor healthy short-selling pressures” on banks.

Shares of regional banks continued their slide this week after the collapse of First Republic Bank, the third US midsize lender to fail in two months. Short sellers made $378.9 million in paper profits on Thursday alone by betting against some regional banks, according to analytics firm Ortex.

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

“State and federal regulators and authorities are increasingly focused on the potential for market manipulation related to bank stocks,” the source said.

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

“The administration is going to closely monitor market developments, including short-selling pressures 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 engagements that it said were “disconnected from underlying financial realities.”

“We urge the SEC to consider all its existing tools and take steps to reduce avenues for abusive trading practices and restore investor confidence,” the committee said.

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SEC Chairman Gary Gensler said Thursday that the agency will pursue any misconduct that threatens investors or markets.

“As I said, in times of increased volatility and uncertainty, the SEC is particularly focused on detecting and prosecuting any misconduct that threatens investors, capital formation, or the markets more broadly,” he said in a written statement.

Lindsay Johnson, president and CEO of the Consumer Bankers Association, insisted the banking industry remains strong and urged policymakers to call out unethical behavior by activist investors who take advantage of market volatility.

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

“These institutions are resilient 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 confirming it was exploring strategic options.

Western Alliance Bancorp ( WAL.N ) denied a report by the Financial Times that it was exploring a potential sale, and said it was exploring legal options. Its shares plunged more than 38%, with stock trading halted several times.

Several regional banks outperformed first-quarter earnings and share price fluctuations did not reflect fundamentals including steady deposits, adequate capital and declining uninsured deposits, the source said.

The evidence does not provide any details on specific cases that have drawn the attention of federal or state regulators.

California’s Department of Financial Conduct and Innovation said it could not confirm the investigations or was aware of any specific market activity. But it said it is focused on “identifying, stopping and correcting any illegal practices in our markets” that violate state law.

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Short selling, in which investors sell borrowed securities and aim to buy back the difference at a pocket-friendly price, is not illegal and is considered part of a healthy market. But the SEC defines manipulation of stock prices as intentional or purposefully conducted conduct designed to deceive or defraud investors by controlling or artificially influencing stock prices, which is illegal.

The surge in short-selling has prompted calls for a temporary ban, but an SEC official said Wednesday the agency is “not currently considering” such a move.

In March, the SEC first warned investors that it was carefully monitoring market stability and would prosecute any irregularities during high market volatility surrounding the collapse of Silicon Valley Bank and Signature Bank.

Edited by Kieran Murray and Chisu Nomiyama

Our Standards: Thomson Reuters Trust Principles.

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