Friday 24 November 2017

Short-selling ban to stay despite fresh capital boost for banks

Regulator believes shares in Irish financial institutions still subject to speculative attacks

Emmet Oliver

THE Financial Regulator will not be lifting the short-selling ban on Irish bank shares even after the banks receive fresh capital injections.

The ban -- introduced at the height of the financial crisis in September 2008 -- was brought in on instructions of former Financial Regulator Patrick Neary. Even though the ban has been lifted in the UK, the Regulator here believes Irish bank shares could still be subject to speculative attack.

Instead, the Regulator, headed by Matthew Elderfield, is in discussions with European regulators about a disclosure regime on short selling, where those shorting a stock to a certain level would have to disclose the position.

While the Irish authorities introduced the ban following a similar move in the UK, the two jurisdictions have followed different paths since then.

Bank of Ireland has received €3.4bn of fresh capital over recent months and AIB is set to raise €10.4bn in capital to meet regulatory requirements. Irish Life & Permanent has been told to raise €145m, but is likely to raise significantly more than this.

Bank of Ireland now has a market capitalisation of €3.1bn and a tier 1 capital ratio of 7.1pc going into 2011, but despite its stronger position than in 2008 and 2009, the authorities believe it is still too early to expose Irish bank shares to open short selling and certainly not without a disclosure regime.

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The Regulator's position is different to that of the Irish Stock Exchange which has been calling for short selling to be allowed return at some stage.

The imposition of the ban removes huge liquidity from the Irish bank shares market and the Irish stock exchange more generally.

Hedge funds and many asset managers hedge their positions by shorting stocks and going long with others. The removal of the chance to hedge positions often means they simply do not invest in markets. Hedge funds are one of the largest sources of investment in world equity markets.

The stock exchange "believes that short selling plays an important role in financial markets and contributes to enhanced liquidity and price formation,'' it said this year.

"The Irish Stock Exchange considers that the introduction of a short-selling disclosure framework should contribute to a more transparent marketplace."

Mr Elderfield is pressing ahead with plans to restrict the number of directorships of bank directors, after consulting the industry since April. Despite queries raised by AIB and Anglo Irish Bank, Mr Elderfield is about to place proposals before his board on this area.

He is also going to exempt IFSC banks from corporate governance changes he is making.

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