By Calling for a Ban on Short-Selling in Bank Stocks, JP Morgan’s Jamie Dimon Just Aggravated PacWest’s Deposit Run

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The market appears to have identified PacWest Bancorp as the next likely domino to fall in the ongoing banking crisis in the US. The stock is down over 20 percent right now and has already experienced at least two trading halts amid heightened volatility. In this combustible situation, JP Morgan’s Jamie Dimon seems to have added further fuel by calling for a sector-wide ban on short-selling.

The ongoing crisis that has gripped mid-sized and small banks in the US has two stimulants. First, these banks are overly exposed to the commercial real estate sector (CRE), which is in a downturn at the moment, spurred by the fact that the Federal Reserve has hiked interest rates at the fastest pace in decades. The growing momentum in CRE loans that are going bad continues to pressure the balance sheets of exposed banks, thereby necessitating a fresh capital influx in some cases. Second, the difference in the returns being offered on bank deposits and money market funds seems to have reached a critical threshold, where depositors are increasingly incentivized to move their inert funds away from the banks that are believed to be in trouble. The lack of a system-wide deposit insurance scheme from the FDIC is further aggravating this trend.

By now, the bank run playbook is quite familiar. The market sniffs out a vulnerability in a particular mid-sized or small bank and then hammers the stock price. This gives rise to a panic in the depositor base of that bank, resulting in outsized deposit outflows. Once this bank run reaches a critical mass and the institution becomes financially unviable, the FDIC