Article from: The Australian AUSTRALIA'S banks were yesterday sucked into the international crisis of confidence in banking stocks.
This came amid renewed pressure on regulators to extend the stock shorting ban to ensure system stability.
The corporate regulator, ASIC, is likely to make a decision this week, as fears grow that banks and financial stocks will be savaged by hedge funds.
The ban is in place until next Tuesday, but ASIC is understood to be "monitoring closely" the overseas crisis that forced the British government to launch a secondary emergency package for the banking industry.
There were renewed fears the UK banking system could collapse after the Royal Bank of Scotland lost a massive 65 per cent of its value in London trading on Monday. This followed the biggest loss in British corporate history.
Other bank shares also fell heavily, with Lloyds, another bank bailed out by the taxpayer, losing 34 per cent of its value.
The turmoil suggested the British Government's second massive rescue package had failed to restore confidence to the financial sector. The selldown in RBS and other banks came on the first trading day after a ban on short selling financial stocks in Britain was lifted.
The British activity spooked stock markets around the world yesterday, with Australian indices enduring heavily selling, led by bank stocks.
The sell-off in the banks was the trigger for the market to close down 3.1 per cent, pushing it the lowest point since November and abolishing the gains made so far this year.
The banking decline was led by NAB, which fell 5.4 per cent; ANZ was down 5.06 per cent; CBA lost 4 per cent; and Westpac dropped 3.67 per cent. On the investment banking side, Macquarie shares were off by 4.33 per cent.
The loss of confidence in the global financial system and the need for a new British bailout prompted calls for the short selling ban in Australia to be extended.
Chief executive of the Australian Bankers Association David Bell said the developments on international markets warranted the ban remaining in place to restore systematic confidence.
"The ABA supports the extension of the temporary ban on short selling of financial stocks in Australia, especially given the recent and overnight activity in the UK following the lifting of the ban in that jurisdiction," Mr Bell said.
The ASX financial index has lost 17 per cent since the ban came into place in October, but individual stocks have outperformed the broader market.
The Australian banks have been the target of shorting by hedge funds throughout the past year. It is estimated that up to 10 per cent of Westpac's issued shares are currently in a "short" position, while 5 per cent of Suncorp's capital is the subject of lending agreements.
The performance of the domestic banks was compounded yesterday after Credit Suisse downgraded the sector on concerns the stocks were now "inexpensive". But the economic outlook would push valuations down more.
UBS director of equity research sales Edward Hartman said the current valuation of the banks could lead to more sales by international investors, as the appetite for financial stocks dwindled.
Mr Hartman said it was "not impossible" that the banks could see savage selling similar to the overseas experience once the ban was lifted. "The Australian banks are trading at a premium to the book value, but in the UK and the US they are at a discount," he said. "Ahead of the short-selling ban coming off, there could be some price action being signalled.
"If you were a long-only fund you would be positioning yourself ahead of that event."
The selling pressure was also driven by some market speculation that ANZ could be the next bank to carry out a capital placement, given it has the lowest tier one ratio of the majors.
The Westpac current offer to retail investors is also facing pressure as the shares are being pitched at $16, a significant premium to yesterday's close of $15.50.
Tom Murphy, a director of Family Office Research Management, a private Sydney funds manager, said investors were preparing for the ban to be lifted.
A number of analysts believe the fortunes of Macquarie Group, a key proponent of the original ban, will be hit by short investors.
"I'm one of the fund managers that have always been opposed to shorting. The purpose of any exchange is capital creation," Mr Murphy said.
(20min delay)