There are already doubts in the City about whether the latest short-selling ban imposed by European financial market regulators will stop banking shares falling.
12:58PM BST 12 Aug 2011
3 CommentsBack in September 2008, European countries - including Britain - introduced a short-selling ban as Lehman Brothers, the US investment bank, fell into administration.
The fall of Lehman triggered a wave of heavy selling of financial stocks because investors feared that other banking behemoths might also be allowed to fail by national governments.
As a result, several countries introduced short selling bans on bank shares, including the UK’s Financial Service Authority (FSA).
At the time, Hector Sants, head of of the FSA, said: “While we still regard short-selling as a legitimate investment technique in normal market conditions, the current extreme circumstances have given rise to disorderly markets”.
European regulators followed suit.
However, the ban failed to stop the decline in financial company share prices in the medium term, as the excellent Reuters graph above shows.
This morning, David Buik, markets analyst at BGC Partners, said banning short selling was "a crass idea”.
He added: “I have heard of a few bone-headed and crass initiatives in my time, but I think Spain’s, Belgium’s, Italy’s and France’s decision to ban ‘short-selling’ temporarily takes the biscuit. Have European politicians learnt nothing from 2008?”
Andrew Shrimpton of financial advisory firm Kinetic Partners, said: “The banning by France, Italy, Belgium and Spain of the short-selling of financial stocks ... will only reduce price volatility for a few days at best."
Mr Shrimpton added: "As demonstrated in 2008, when similar bans were in place, volatility increases after a day or so because liquidity in the stocks is significantly reduced. This measure will reduce the ability for banks to raise capital and increase the risk of a full blown recession in the countries that have adopted the ban.”