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Financial Stability and Regulatory Compliance

Short Selling Bans

In both the 2008-09 crisis and the 2011-12 euro debt crisis, security regulators imposed short selling bans, targeting them mainly at financial institutions. This was motivated by the fear that a collapse in a bank’s stock price could lead them to experience funding problems which would trigger further price drops. Short-selling bans of bank stocks would break this loop, stabilizing banks and enhancing their solvency. This study assesses the impact of short-selling bans through the estimation of panel data regressions for 13,473 stocks in 2008 and 16,424 stocks in 2011 from 25 countries while taking the endogeneity of short-selling bans into account. Contrary to the regulators’ intentions, it was found that short-selling bans were not associated with increased bank stability in either crisis. Instead financial institutions who were subject to short-selling bans observed larger stock price drops, return volatility and probability of default. Moreover, the 2011 ban did not help to mitigate the “diabolic loop” between bank and sovereign insolvency risk during the euro-area sovereign debt crisis.


University: Università di Napoli Federico
Project Lead: Marco Pagano

Lead Researcher

Marco Pagano

Marco Pagano holds a B.A. in Economics from Cambridge University (UK) and a Ph.D. in Economics from MIT. After teaching at the University of Naples, at Bocconi University and at the Università di Salerno, he is now a Professor in the Economics Faculty at Università di Napoli Federico II. He is Co-Director of the Research Programme in Financial Economics of the Centre for Economic Policy Research and a member of the Council of the European Economic Association. He is a consultant to the Italian Treasury on the reform of security markets, and a member of the Treasury's commission for privatisations.

In 1997 he was awarded the BACOB European Prize for Economic and Financial Research, jointly with Ailsa Röell. Most of his work is in the area of financial economics, especially in the field of stock market microstructure, where he has investigated the relationship between stock market thinness, price volatility and liquidity; the differences between dealer and auction markets; and the competition between trading systems in European equity markets. Recently, his research interests have also included topics in banking and corporate finance.