As First Republic Bank‘s share price fell by double-digits in the aftermath of the collapse of Silicon Valley Bank last month, some people close to the San Francisco-based lender were worried short sellers were exacerbating its travails, according to a source familiar with the situation.
Investors who wager shares in a company will fall were increasing bets on First Republic’s stock when it was already taking a beating, making it difficult for the bank to recover its value, according to the source.
Short interest in First Republic indeed increased as turmoil in the banking sector intensified, although measures vary. The percent of shares borrowed — the basic mechanism of a short bet — was minimal to start the month but increased to between 7% and 37% by March 31, according to various data provider calculations, versus averages between 3% and 5% across all stocks.
Two of the banks that shut down last month, Silicon Valley Bank (SVB) and Signature Bank, showed a similar pattern: short interest increased as their stock started to fall, at varying degrees of intensity.
Problems at US regional banks grew last year, as rapidly rising interest rates slashed the value of some banks’ holdings in long-term assets such as home loans and government bonds. Some lenders were also challenged by exposure to cryptocurrency and technology companies. The underlying issues exploded last month when depositor flight spiraled out of control and regional lenders across the board saw their shares hit.
How much short sellers contributed to the downward spiral reprises the debate about whether so-called shorts are market watchdogs or opportunistic investors who profit from others’ misery. In the case of the banking crisis, a review of data and interviews with short sellers and their critics show, the answer may be both.
“The shorts in the months before the collapse were accurately warning the markets…that the bank (SVB) was being dangerously mismanaged,” Dennis…
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