Ban on short selling is now long past its sell-by date


OPINION:The veto bought the Government some time last year, but there is no justification to retain it, writes JOHN McMANUS

YOU COULD be forgiven for thinking the Financial Regulator has a death wish. It latest regulatory edict verges on the Pythonesque, eating into what is left of its credibility.

“Brokers be vigilant”, came the clarion call from Dame Street on Friday last. The bank apparently wants Irish brokers to “continue their vigilance” in relation to the short-selling ban on Irish bank shares which remains in place despite the lifting of a similar ban in the UK last January.

Short sellers in effect borrow a share from someone, sell it and then hope to buy it back at a lower price before they are due to return it to the owner. Advocates of short selling say it increases liquidity and makes for better pricing, whilst its detractors are concerned about amplification effects on share price movements if people are in effect selling shares they do not own.

Shorting became a serious cause of concern during the prolonged run on bank shares – both here and internationally – last year and led to temporary bans being put in place.

The Financial Regulator apparently has no reason to suspect that the recent fall in Irish banks has has any thing to do with speculative and illegal shorting. Likewise, it has not discovered any significant instances where the short-selling ban has been breached.

So why the Pathé newsreel-style appeal to the brokers? It is a precautionary measure apparently. The inference being that the bank has “good intel” that Johnny Foreigner may have infiltrated our lines and cunningly taking advantage of our gallant brokers to launch an attack on one of our fuel depots. Sorry got a bit carried away there . . . one of our banks.

It’s laughable really and conjures up images of a situation room in the central bank staffed by immaculately made-up girls in uniform pushing around bits of card on a map table with broom sticks, pausing only briefly to shed a tear as another of our bank shares is shot down and then returning bravely to the task at hand. Bandits approaching Dawson Street! Compliance officers scrambled!

There is however a serious point: why are we continuing with the ban on short selling bank shares when the British have stopped?

It’s now pretty clear that the run on Irish bank shares was completely justified on the basis that they were broke, Anglo Irish Bank being the case in point. The ban followed the massive sell-off of Anglo Irish shares on St Patrick’s Day in 2008, the so-called Paddy’s Day massacre.

On the basis what we now know about Anglo Irish – from its corporate governance through to its exposures to the Irish property market and the fundamental flaw in its model (dependence on wholesale funding) – the sell-off was completely justified.

Equally, nothing has emerged about the other quoted banks that would make the sell-off in their shares irrational. With hindsight, it’s clear they were going bust and there were good grounds to doubt the Government’s ability to save them.

If the ban on short selling had not been introduced, bank shares might have got to where they ended up a little bit more quickly than otherwise – but they were going to end up there anyway.

If the ban served any purpose at all, it was to buy the regulator and the Government a little bit more time as the fast-shrinking market capitalisation of the banks pushed them closer and closer to insolvency. It is hard to put a value on that without remembering the panic that gripped the system at that point.

But none of this amounts to a justification for keeping the ban at the moment. There is possibly an argument that anything that supports the share price or reduces volatility ahead of the Nama-related recapitalisations is helpful if you want to avoid full-scale nationalisation. But even the effectiveness of a short-selling ban in this regard is questionable.

The only rational reason for continuing with a ban on short selling bank shares is if – to borrow a phrase from Lord Turner of the Financial Services Authority – you think it serves no socially useful purpose.

If you see the stock market as some sort of no-holds-barred casino, with the making of money the only objective, then by all means have short selling and any other scheme you can think of.

The counter argument, which is bolstered by the events of the last 18 months, is that the stock market should really function to provide a conduit for people’s savings into productive businesses.

Short selling is a bit harder to justify in that context.

But if that is your view, then ban it completely rather than persist with a pointless ban on shorting banks.