Short-Selling Bans and Bank Stability

39 Pages Posted: 17 Feb 2016

See all articles by Alessandro Beber

Alessandro Beber

Cass Business School; Centre for Economic Policy Research (CEPR)

Daniela Fabbri

City University London - Sir John Cass Business School

Marco Pagano

University of Naples Federico II - Department of Economics and Statistics; Centre for Studies in Economics and Finance (CSEF); Einaudi Institute for Economics and Finance (EIEF); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

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Date Written: February 2016

Abstract

In both the 2008-09 subprime crisis and the 2011-12 euro debt crisis, security regulators imposed bans on short sales, designed mainly with financial institutions in mind. The motivation was that a collapse in a bank's stock price could lead to funding problems, triggering further price drops: the ban on shorting bank stocks was supposed to break this loop, stabilizing banks and bolstering their solvency. We test this hypothesis against evidence from both crises, estimating panel data regressions for 13,473 stocks in 2008 and 16,424 stocks in 2011 in 25 countries, taking the endogeneity of short-selling bans into account. Contrary to the regulators' intentions, in neither crisis were the bans associated with increased bank stability. Instead, when financial institutions were subjected to a short-selling ban, they displayed larger share price drops, greater return volatility and higher probability of default. And the effects were more pronounced for the more vulnerable banks. Nor did the ban in 2011 do anything to mitigate the 'diabolic loop' between bank and sovereign insolvency risk during the euro-area sovereign debt crisis.

Keywords: ban, bank stability, financial crisis, short-selling, systemic risk

JEL Classification: G01, G12, G14, G18

Suggested Citation

Beber, Alessandro and Fabbri, Daniela and Pagano, Marco, Short-Selling Bans and Bank Stability (February 2016). CEPR Discussion Paper No. DP11090. Available at SSRN: https://ssrn.com/abstract=2733024

Alessandro Beber (Contact Author)

Cass Business School ( email )

London, EC2Y 8HB
Great Britain

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Daniela Fabbri

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Marco Pagano

University of Naples Federico II - Department of Economics and Statistics ( email )

Via Cintia - Monte S. Angelo
Napoli, 80126
Italy
+39 081 675306 (Phone)
+39 081 7663540 (Fax)

Centre for Studies in Economics and Finance (CSEF) ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

Einaudi Institute for Economics and Finance (EIEF)

Via Sallustiana, 62
Rome, 00187
Italy

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http:/www.ecgi.org

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