EU States Enact Short-Selling Ban to Prop Up Markets

France (NYSE:EWQ), Italy (NYSE:EWI), Spain (NYSE:EWP), and Belgium have all imposed bans on short-selling in order to stabilize European markets after bank stocks fell to their lowest level since the financial crisis. Short-sellers sell borrowed shares only to later buy them back at a lower price.

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Regulators are imposing the bans in order to “restrict the benefits that can be achieved from spreading false rumors or to achieve a regulatory level playing field,” according to the European Securities and Markets Authority. While the authorities recognize that short-selling can be a “valid trading strategy”, they claim that lately it has been used in conjunction with spreading false market rumors in a move that has been “abusive”.

With European bank stocks plummeting, regulators hope to quell concerns that lenders may be low on funds. However, such may in fact be the case, with banks’ overnight borrowing from the European Central Bank climbing to its highest level in three months yesterday. Regulators last imposed a ban on short sales in September 2008 after Lehman Brothers collapsed.

The ban already seems to be working, with shares of French bank Societe Generale up 3.61% so far today after falling steadily for weeks, down 30% in the last month. But not everyone is happy. Jim Chanos, a short seller known for predicting Enron’s collapse, says that, “EU policy makers don’t seem to understand the law of unintended consequences…The vast majority of short-selling financial shares is by other financial institutions, hedging their counterparty risks, not speculators.”

Banks are growing more reluctant to lend to each other for longer than overnight, just as Chanos would have predicted, given that, following the last ban on short selling, interbank lending almost came to a complete halt. Those affected by the regulations in France include Axa SA, BNP Paribas, Credit Agricole SA, Natixis, and of course, Societe Generale. In Belgium, Ageas, Dexia SA, KBC Groep NV and KBC Ancora are all covered by the ban.

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The ban on short selling is largely in response to rumors specifically about France (NYSE:EWQ), said Steven Maijoor, chairman of the European Securities and Markets Authority. Concern that French banks are short on funding has been the primary culprit for the market sell-off for European banks. According to RBS (NYSE:RBS) analyst Stefan Stalman, “The mix of euro doubts and rating fears in recent days and weeks may have dented the confidence of funding counterparties, which has then fed back into equity markets.”

Spain’s Bankia SA, Italy’s UniCredit SpA and Intesa Sanpaolo SpA, Germany’s Commerzbank AG, Societe Generale, and Credit Agricole are among the banks with the lowest net stable funding ratios, and rely on short-term funding. Stable funds can be relied upon for at least a year, no matter the market conditions, and can include term deposits and long-standing consumer deposits. The new Basel rules, which will be enacted in 2018, set a minimum amount of stable funds that banks must keep on hand at all times in order to finance lending.