Exclusive: U.S. officials assessing possible ‘manipulation’ on banking shares – source

(Reuters) – U.S. officials at the federal and state level are assessing the possibility of “market manipulation” behind big moves in banking share prices in recent days, a source familiar with the matter said on Thursday.

Shares of regional banks resumed their slide this week after the collapse of First Republic Bank (OTC:), the third U.S. mid-sized lender to fail in two months. Short sellers raked in $378.9 million in paper profits on Thursday alone from betting against certain regional banks, according to analytics firm Ortex.

Increased short-selling activity and volatility in shares have drawn increasing scrutiny by federal and state officials and regulators in recent days, given strong fundamentals in the sector and sufficient capital levels, said the source, who was not authorized to speak publicly.

“State and federal regulators and officials are increasingly attentive to the possibility of market manipulation regarding banking equities,” the source said.

PacWest Bancorp shares slid 57% on Thursday, dragging down other regional lenders, after the Los Angeles-based bank said it was in talks about strategic options.

Western Alliance (NYSE:) Bancorp denied a report from the Financial Times that said it was exploring a potential sale, and said it was exploring legal options. The report had sent the lender’s shares down as much as 61.5% before trading was halted.

Share price swings did not reflect the fact that many regional banks outperformed on first quarter earnings and had sound fundamentals, including stable deposits, sufficient capital, and decreased uninsured deposits, the source said.

“This week we have seen that regional banks remain well- capitalized,” the source said.

Short selling, in which investors sell borrowed securities and aim to buy these back at a lower price to pocket the difference, is not illegal and considered part of a healthy market. But manipulating stock prices, which the SEC has defined as the ‘intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting” stock prices, is. 

An official with the U.S. Securities and Exchange Commission told Reuters on Wednesday the agency was “not currently contemplating” a short-selling ban.

On Thursday the agency did not respond immediately to a Reuters request for comment.

But the source familiar with current events noted that the agency had warned in March, during a previous period of high market volatility surrounding the collapse of Silicon Valley Bank and Signature Bank (OTC:), that it was carefully monitoring market stability and would prosecute any form of misconduct.

(Edited by Kieran Murray and Chizu Nomiyama)

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