Paper Spotlight: Short-Selling Bans and Bank Stability

Alessandro Beber

Daniela Fabbri

Marco Pagano

Saverio Simonelli







Regulators around the world often react to financial crises by restricting short sales of bank stocks to maintain financial stability. Then, a natural question to ask is whether these short-selling restrictions end up alleviating unwarranted price drops for banks and hence protect vulnerable financial institutions. In a forthcoming RCFS paper, “Short-Selling Bans and Bank Stability,” Alessandro Beber, Daniela Fabbri, Marco Pagano, and Saverio Simonelli find that the answer is not necessarily yes. Contrary to the regulators’ intentions, in both the Subprime Crisis of 2008-09 and Eurozone Crisis of 2011-12, financial institutions whose stocks were banned experienced greater increases in the probability of default and volatility than unbanned ones. To alleviate any concerns that short-selling bans are not imposed randomly, author s carefully match banned financial institutions with unbanned ones with similar sizes and levels of riskiness, and use regulators’ propensity to impose a ban in the 2008 crisis as an instrument for the 2011 ban decisions. The effects they document–increases in the probability of default and volatility–are stronger for banks that were most vulnerable in terms of solvency and liquidity mismatch. Furthermore, these short-selling banks did not appear to support stock prices of these banks either. Overall, short-selling bans imposed by regulators during the two financial crises studied did not seem to succeed in improving the perceived solvency of financial institutions and reducing the volatility of their stock prices.

Spotlight by Isil Erel
Photos courtesy of Alessandro Beber, Daniela Fabbri, Marco Pagano, and Saverio Simonelli

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