The Impact of the 2011 Short‐Sale Ban on Financial Stability: Evidence from the Spanish Stock Market

Published date01 November 2016
Date01 November 2016
The Impact of the 2011 Short-Sale Ban
on Financial Stability: Evidence from
the Spanish Stock Market
Oscar Arce
Banco de Espa~
na, DG Economics and Statistics, Calle Alcal
a 48, 28014, Madrid, Spain
Sergio Mayordomo
School of Economics and Business, University of Navarra, Edicio Amigos, 31009 Pamplona, Spain
We examine the effect of the 2011 short-selling ban on Spanish stocks on the
nancial sectors risk level. Before the ban, short positions were positive and
signicantly related to several indicators of bank default risk. Subsequently, the
ban moderated the risk of banking institutions, especially those more exposed to
short-seller activity, which, on average, showed higher levels of maturity
mismatch, uncertainty about their fundamentals, and exposure to sovereign risk.
The ban also caused a side effect on non-nancial rms, since it led to an increase
in their exposure to short sales, reecting the existence of a common aggregate risk
Keywords: short-sales constraints, financial stability, financial institutions, credit
default swap, contagion
JEL classification: G01, G12, G14, G18
The authors would like to thank John Doukas (the Editor), an anonymous referee, Ricardo
Gimeno, Ana Gonz
nigo de la Lastra, German Lopez-Espinosa, David Marqu
nez, Melissa Porras, Stefano Puddu, Fernando Restoy, Diego Rodr
ıa Rodr
ıguez-Moreno, Pedro Saffi, Lucio Sanju
an, Rafael Santamar
ıa, Peter Sinclair,
Kumar Venkataraman and other participants at the Second CNMV International
Conference on Securities Markets, the XX Finance Forum, the 2013 ESCB Day-Ahead
Conference (Bank of England), the 2014 World Finance Conference (Venice), and Goethe
University, Public University of Navarra and University of Neuchatel seminars. Sergio
Mayordomo acknowledges financial support from MCI grant ECO2012-32554. This paper
was previously circulated under the title Short-sale Constraints and Financial Stability:
Evidence from the Spanish Market. The opinions in this article are the sole responsibility
of the authors and they do not necessarily coincide with those of the Banco de Espa~
European Financial Management, Vol. 22, No. 5, 2016, 10011022
doi: 10.1111/eufm.12085
© 2016 John Wiley & Sons, Ltd.
1. Introduction
On 11 August 2011, the supervisors of four European countries (Belgium, France, Italy
and Spain) announced a ban on establishing or increasing short positions in nancial
institutionsstocks. This measure was adopted at a time of heightened aggregate
uncertainty and volatility in nancial markets that coincided with the resurgence of
tensions in the sovereign debt markets of various euro area countries.
The Spanish regulator (Comisi
on Nacional del Mercado de Valores, or CNMV), in its
own communication enacting the ban, argued that the extreme volatility then affecting
European securities markets in general and bank sector stocks in particular was posing a
material threat to the stability and orderly functioning of markets. Therefore,
safeguarding nancial stability was the leading motive behind the decision to
temporarily prohibit short positions in the shares of 16 Spanish nancial corporations.
Although there is an extensive literature that analyses the effect of short-sale bans on
market performance, including the impact of the ban on liquidity, stock prices and price
little is known about the impact of restrictions on short positions on the
stability of the nancial sector. We analyse the implications of the ban imposed by the
Spanish regulator in terms of nancial stability, which we proxy by means of indicators
of bank default risk, including model-based default probabilities and prices of credit
default swaps (CDSs).
As a preliminary step, we offer evidence of a positive relationship between short positions
and the default risk indicators of banks in the weeks preceding the ban. Subsequently, the
ban contributed to a signicantmoderation of thedefault risk of banks relativeto that of non-
nancial rms, whose risk indicators were unaffected by the short sales prohibition.
Specically, the ban was signicantly effective in reducingthe default probability of banks
on whose capital short sellers had accumulated higher positions prior to the ban.
But why were some rms shorted more aggressivelythan others? The potential linkage
between the short selling of nancial stocks and banking stability has recently been
explored from a theoretical standpoint in several articles. Brunnermeier and Oehmke
(2014) explore a setting where short-term creditors impose leverage constraints on
nancial institutions. Then, when a rm is sufciently close to such constraints, by
aggressively short-selling its stock, short sellers can force its liquidation. In some cases,
this outcome may coexistwith a high-valuation equilibrium in which liquidationand short
sales do not take place.Hence, the authors conclude that temporary restrictionson the short
selling of stocks from vulnerable institutions may be justied to avoid inefcient
liquidations.Though based on different grounds,a similar policy recommendation follows
from the analyses of Brunnermeier and Pedersen (2005) and Venter (2011).
Liu (2015) examines a different channel through which the short sales of a banks
stock can cause its failure. At the core of the mechanism is the idea that creditors, who
The rms affected by the ban were Banca C
ıvica, Banco Bilbao Vizcaya Argentaria, Banco
de Sabadell, Banco de Valencia, Banco Espa~
nol de Cr
edito, Banco Pastor, Banco Popular
nol, Banco Santander, Bankia, Bankinter, Caixabank, Caja de Ahorros del
aneo, Grupo Catalana de Occidente, Mapfre, Bolsas y Mercados Espa~
noles and
Renta 4 Servicios de Inversi
See, for example, Beber and Pagano (2013), Boehmer et al. (2013), Boehmer and Wu
(2013), Bris et al. (2007), Marsh and Payne (2012) and Safand Sigurdsson (2011).
© 2016 John Wiley & Sons, Ltd.
Oscar Arce and Sergio Mayordomo

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