A ban on short-selling financial stocks in four European countries takes effect today (12 August). The move is aimed at restoring confidence in a market hit by rumours and higher borrowing costs.
France, Italy, Spain and Belgium imposed the ban, which will vary in detail depending on the country, the European Securities and Markets Authority (EMSA) said in a statement late on Thursday.
European markets have repeatedly moved on rumours about the health and funding needs of indebted euro zone governments, and more recently on some of its major banks.
The DJ Stoxx index of European banking stocks has fallen 37 percent from a peak in February and touched a 28-month low on Thursday. The index is down 17 percent in August alone.
"It's one of those things that politicians grasp for when they have no other tools left in their arsenal," said James Angel, an associate professor specializing in financial market regulation at Georgetown University's McDonough School of Business in Washington DC.
"All it really does is kick sand in the ears of the market and signals to the world that the leaders are clueless as to what's going on."
European regulators had previously played down the idea of a blanket ban on short-selling, through which an investor borrows shares and sells them on the expectation their price will fall and they can be bought back at a lower price.
EMSA said short-selling combined with rumour-mongering created a strategy that was "clearly abusive."
"Today some authorities have decided to impose or extend existing short-selling bans in their respective countries," it said. "They have done so either to restrict the benefits that can be achieved from spreading false rumours or to achieve a regulatory level playing field."
France will ban short selling on 11 financial stocks for 15 days, Spain will protect 16 stocks for 15 days, while Belgium will ban short selling of four financial stocks for an indefinite period. Details of the Italian ban were not immediately clear.
Banks on the list included France's BNP Paribas and Societe Generale , and Spain's Santander and BBVA .
For a full list of the French, Spanish and Belgian stocks, see:
The European assault mirrors one by the U.S. Securities and Exchange Commission on 19 September 2008, four days after Lehman Brothers collapsed, to temporarily ban short selling in 799 banks and other financial institutions.
The UK imposed a similar prohibition at that time.
The US move was of questionable value, according to several academic studies. While share borrowing fell during the three-week ban, financial stocks continued to plummet.
It also raised philosophical issues about whether regulators should interfere with the free market and the rights of investors to hedge or speculate. The move was also criticized by at least one former SEC official as a political decision.
"If you talk to people who understand the technology of markets, including regulators, it's the general consensus that banning short-sales doesn't achieve the stated objectives," said Nicholas de Boursac, chief executive of the Asia Securities Industry and Financial Markets Association.
In Asia, South Korea banned short-selling in all listed stocks on Tuesday. It already had a rule in place prohibiting the shorting of financial stocks. Hong Kong is bringing in rules forcing investors to disclose short positions above a certain threshold to the market regulator.
Some hedge fund experts said the European ban would likely limit liquidity by shutting out some market participants.
"For every short position there must be an equivalent purchase at some point. That's not the case if investors have to protect themselves by moving to cash -- there's then no imperative to buy," said Peter Douglas, chief executive of GFIA, a Singapore-based wealth manager and hedge fund consultant.
"However, banning short-selling is helpful politically, as it demonstrates to electorates that governments are doing something."
Fragile French banks?
The latest market turmoil focused on speculation about French banks, which are heavily exposed to European countries at the centre of the region's debt crisis. Societe Generale , France's No. 2 lender, has especially been in the eye of the storm.
Those rumours sent shock waves through credit markets, pushing interbank borrowing rates higher and triggering a 3-month high of 4 billion euros in emergency overnight borrowing from the European Central Bank.
The turmoil drove up European banks' borrowing costs to levels not seen since the 2007-2009 global credit crisis and raised the question whether the difficulties may foretell a repeat of the crisis, when arteries of global finance seized up.
"With banking rumours surfacing yesterday, it feels like the run-up to Lehman's collapse, where banks don't trust each other," said Commerzbank rate strategist Christoph Rieger.
The signals from Europe also set off alarm bells in Asia. Banking sources told Reuters on Thursday that one bank in the region had cut credit lines to major French lenders, while five others were reviewing trades and counterparty risk.
Investors said the latest loss of confidence was a sign that few of the problems that brought bank lending to a halt last time around have really gone away.
"The market is already broken. It has never fully recovered anyway from 2008. Liquidity comes in fits and starts, and risk appetite in the banks is understandably very modest," said Stephen Snowden, fixed income manager at Aegon Asset Management.
Bank of France Governor Christian Noyer said French banks were solid and would not be affected by the market turmoil.
"Their capital levels, boosted by strong equity capital, are adequate, and their medium- to long-term financing programs are being carried out in perfectly satisfactory conditions," Noyer said in a statement.
EurActiv with Reuters
“The European Commission, and Commissioner Barnier in particular, strongly welcome the recent developments. However, our approach would be even more effective and coordinated if we had a European framework in place for short-selling,” said Internal Markets Commissioner Barnier’s spokeswoman Chantal Hughes.
Hughes said: “As you know, nearly a year ago, the Commission put forward such a proposal with the objectives of creating a harmonised framework for coordinated action at European level, to increase transparency and reduce risks. The new powers would mean regulators – national and European - have clear powers to act when necessary, whilst preventing market fragmentation and ensuring the smooth functioning of the internal market.”
“We are now very close to an agreement. Commissioner Barnier would like to call on both co-legislators to make the final step towards a comprehensive compromise so a deal can be reached in September,” Hughes concluded.
Recent events on the markets have proven once again how important it is that Europe can act fast and in a coordinated fashion. We should give ourselves all the tools to do so.
Germany supports the ban by the four countries and will push for a European ban on naked short-selling of stocks, government bonds and credit default swaps, German Finance Ministry spokesman Martin Kotthaus said.
"We are advocating a wide-reaching ban on naked short-selling of stocks, sovereign bonds, and credit default swaps," Kotthaus added, "only this way can destructive speculation be countered convincingly."