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Are Regional Banks Having Their ‘GameStop Moment’?

230511 Gamestop Blog

CNN said one explanation for last week’s ups and downs could be ‘meme-stocking,’ where ‘skittish investors’ trade on ‘fear and momentum instead of on fundamental values.’

Recent volatility in regional bank shares has caught the eye of state and federal officials—and even the White House—with some wondering if “market manipulation” is to blame.

Late last week, as contagion fears related to First Republic Bank’s failure spread, short sellers pocketed nearly $400 million by betting against the stocks of a handful of regional banks. Indeed, several banks saw their stocks plummet last Thursday. And after a rally Friday that lasted into this week, volatility returned today.

What was curious—and concerning—about the sudden stock movement last week was that several banks involved had strong fundamentals, normal deposit flows, and sufficient capital. So, what was happening?

In a letter to SEC Chair Gary Gensler, the American Bankers Association called out “short selling practices that distort the markets through manipulation and abuse” and urged the SEC “to consider all its existing tools and to take measures to reduce the avenues for abusive trading practices and restore investor confidence.”

White House Press Secretary Karine Jean-Pierre said the administration would “closely monitor” short selling pressures on “healthy banks.”

While a short-selling ban is unlikely, Gensler released a statement saying the SEC is working to identify and prosecute “any form of misconduct that might threaten investors, capital formation, or the markets.”

Last year, RMA’s paper “Addressing Misconceptions in Securities Lending” explained that while some may advocate for short selling bans as a stabilizing force during times of market stress, empirical evidence shows that such bans can have the opposite effect. A 2012 Fed study came to a similar conclusion.

CNN said one explanation for last week’s ups and downs could be “meme-stocking,” where “skittish investors” trade on “fear and momentum instead of on fundamental values.”

Jaret Seiberg, financial services analyst at TD Cowen Washington Research Group, said, “We believe regional banks are suffering from a GameStop-like moment where misinformation circulating on social media is fueling stock price declines that threaten funding and solvency.”

An American Banker story wondered if short selling was the primary problem, or just a sign of larger industry issues