Smaller Banks Are Scrambling as Share Prices Plunge

It would require legislation from Congress to amend the current deposit insurance system.

Amid the relentless stock declines, some blamed a different boogeyman: Investors who bet on a fall in the price of a stock. Short sellers have made nearly $7 billion this year betting against regional banks, according to estimates by S3 Partners, a data provider, and can direct those profits toward new targets.

PacWest appeared most squarely in their cross hairs, for the moment at least. Almost 20 percent of the bank’s shares are currently on loan to short sellers, who sell them and hope to buy them back later when the stock has fallen, according to data from S3. Nearly 8 percent of Western Alliance’s shares are similarly lent out.

Before First Republic was seized, over 36 percent of its shares were out on loan.

On Thursday, Western Alliance blamed those short sellers for the turmoil, suggesting they were behind “false narratives about a financially sound and profitable bank,” as it issued a statement denying a report that it was considering a sale.

Such attacks rarely work against short sellers, and the banks’ disclosures, on Wednesday and Thursday, detailing that their depositors weren’t fleeing and that their capital base was sound, didn’t seem to either.

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