France, Spain, Italy and Belgium’s bans on short-selling may fail to reverse the fall in financial stocks and instead may concentrate bets against banks elsewhere in Europe, according to lawyers, investors and academics.
British financial stocks dropped 41 percent in the four months after regulators imposed a ban on short selling following the collapse of Lehman Brothers Holding Inc. in September 2008. The benchmark FTSE 100 index fell 15 percent in the period. When the Securities and Exchange Commission prohibited short-sales for three weeks in September 2008 a Bloomberg Index tracking the 880 U.S. stocks affected fell 26 percent, outpacing the Standard & Poor’s 500 Index’s 22 percent decline.
European regulators are divided over how to respond after a rout that sent the region’s bank stocks to their lowest in almost 2 1/2 years this week. Germany and the Netherlands have said they don’t plan further restrictions on short sales, while British regulators said they don’t plan to limit the practice.
“In contrast to the regulators’ hopes, the overall evidence indicates that short-selling bans at best left stock prices unaffected and at worst may have contributed to their decline,” said Alessandro Beber, a professor at Cass Business School in London who’s studied short-sales bans in 30 countries.
Short-sellers sell borrowed shares with plans to buy them back later at a lower price, a practice politicians and some investors blame for roiling markets.
Partial Ban ‘Problem’
“The problem with a partial ban -- which is what we have now -- is that it moves the problem to other parts of the system,” Bob Penn, a financial regulation partner at law firm Allen & Overy LLP in London, said. “It would be reasonable to expect the short sellers to turn their attention to non-Italian or non-French banks with significant exposures to those jurisdictions, for example.”
Dexia SA (DEXB), KBC Groep NV (KBC) and Mediobanca SpA led the Bloomberg Europe Banks and Financial Services Index up 2.7 percent as of 1:20 p.m. in London. Dexia, Belgium’s biggest bank by assets, climbed 13 percent and KBC advanced 9 percent. The index is still down 25 percent this year.
“European bank stocks, while bouncing up in a knee-jerk response in September 2008 when a short-selling ban was announced, dropped sharply over the next few months as the financial and economic crisis worsened,” Barclays Capital analysts wrote in a report to clients today. “Short-selling bans have proven ineffective in the past, tend not to address the real underlying issues in Europe, reduce liquidity and increase the related risk premiums.”
Bloomberg
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http://www.bloomberg.com/news/2011-08-11/france-spain-italy-belgium-ban-short-sales-to-halt-rout-in-bank-shares.html
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