Reflections on the Extension on Short Selling Ban

The odd thing about the extension of the ban on short selling is that the major Australian banks have re-capitalised, won market market share and are well positioned compared to their international counterparts. Yet, financials are not protected from short selling in other developed markets.

Does the Government know something about the strength of the Australian banks that the market does not know? Unlikely. Are they worried about some financial institutions in particular and the systemic risk of a bank failure? Possibly.

Then, putting aside the fact that there is no evidence to support the effectiveness of the ban, the resulting market inefficiency can be considered a tax on investors. Rather than lay the cost of this support on investors, it would be fairer to make specific provision by providing direct capital support to the organisation(s) they believe carry systemic risk. As the ban on short selling is likely to be ineffective, this is a likely eventuality in any case.

The markets could then be left to find equilibrium, operate effectively and re-build the confidence that has been lost as a result of the short selling bans applied to date.