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By Huw Jones
BRUSSELS, Jan 21 (Reuters) - Europe’s banks said on Wednesday that curbs on short selling, a practice blamed by critics for accelerating falls in bank share prices, have not been proven to work and could be counterproductive.
Several European Union member states introduced curbs on short-selling financial shares last September and banks said the lack of coordination among regulators created confusion and forced investment firms to close positions quickly at a loss.
“There is no clear evidence that restrictions on short selling do indeed limit share price volatility or reduce the ultimate asset price declines,” the European Banking Federation said in comments to a grouping of all national market regulators in the EU.
A short-selling ban in Britain ended last week and banking shares such as Barclays (BARC.L) and RBS (RBS.L) have tumbled since then as investors bet the latest government rescue package for the sector won’t work.
The Financial Services Authority (FSA) which regulates Britain’s stock market, has said it would reintroduce the measure without consultation if needed.
Short selling is selling borrowed stock in the hope of repaying the loan at a profit by buying the shares back at a lower level.
“Upfront, short selling should be understood as a normal and naturally acceptable strategy for investors that believe certain instruments are overvalued, in the same way as investors buy financial instruments when they believe these are undervalued,” the EBF said.
“Against this backdrop, the issue that should in our view be assessed, rather than short selling as such, is the question of how to prevent or limit most effectively the potential abuse of short selling,” the federation added.
Regulators across the EU were under pressure to find ways of stabilising stock markets as banks bore the brunt of volatility, with some policymakers blaming hedge funds, which often sell stocks short, for the rocky ride.
There should also be a distinction between “covered” short selling where an investor borrows a security to sell it, and “naked” short selling where an investor has no security to cover the transaction.
“Whilst more concerns have over the past months been voiced with regard to naked short selling, it would however be preliminary and unsubstantiated to argue at this stage that naked short selling should per se be seen as harmful and undesirable,” the EBF said.
There should be no permanent restriction of, covered short selling, the federation said, criticising what it saw as a lack of coordination in introducing curbs.
“In itself, these uncertainties led to additional turbulence in the market. In addition, many firms that were taken by surprise by the regulatory intervention were forced to close legitimate open positions quickly, often at considerable cost and loss,” the EBF said.
“If further research demonstrates the added value of such measures, we believe that reporting and/or disclosure solutions would be the preferable solution,” the EBF said.
Reporting by Huw Jones, editing by John Stonestreet