The US financial market is being faced with a major banking crisis and things seem to be escalating instead of calming down. In response to this, analysts from JP Morgan believe that regulators in the US could take a stance against short selling as a measure to prevent any possible contagion. Short selling is an investment technique where an investor bets that a security’s value is going to decrease in the future. This phenomenon has been identified by the American Banker Association, who noted that certain stocks seem to be trading contrary to their underlying fundamentals. This fear has destabilised the stocks of banks in even good financial positions.

Highlighting the situation, JP Morgan said they have never seen “perfectly healthy banks” having to be transferred to the Federal Deposit Insurance Corporation in such a short period. On analysis of trading data, the company Ortex reported that shorters have managed to make around $1.2 billion by taking positions against the collapsing stocks. For example, on 4th May alone, they made $379 million.

Despite the hardships being faced, 49% of the population have confidence in the stability of their banks as well as the safety of their deposits, according to Ipsos, a public polling firm. Moreover, a huge chunk of the surveyed individuals supported government bailouts for the affected banks.

To lessen the fear in the banking sector, regulators are likely to start taking restrictive action against short selling. While this could be seen as a reasonable measure in the short term, over the long run it does not tackle the actual issue and could result in a further decline in confidence. To ensure that the affecting banks do not fall apart, it is also important to take proper measures to reduce the harms of the crisis.



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