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Moolamanic:

If you have an existing short on the banks, and the short ban is imposed, you are not forced to close out your positions, but you have to pay increased margins (probably 50%) instead of the usual 20%. Stands to reason, if they actually ban shorting on banks, then the existing shorts will have NO reason to close their shorts, and will hedge themselves buying calls. The immediate aftermath of a short ban on banks will cause the shares of the banks to gap up and get decimated as the day wears on, dragged by index selling and lack of buying (no short covering).

Why index selling? Well, if you cannot short banks, and you need to hedge a massive stock portfolio, you start shorting higher beta stocks which mirror the index. That means Hills, Rio, Woodside and materials for the Australian market. It means tech stocks and manufacturers in Europe and the States.

Shorting bans are the WORST intervention ever, because they serve to do nothing but remove liquidity in a market that is already starved with liquidity. Without short covering, there can only be REAL buying that drives prices up, and no fund is going to take the view of driving prices up in a market were they are reliant on someone else having a positive view to take them out at a higher level.

Shorting bans only serve to accelerate the downside - witness the fall of the Italian, French and Spanish banks since the Euro regulators banned shorting on these stocks. They've done nothing but get destroyed, and worse, other banks which are healthier are being decimated as shorts pile in as a proxy trade.