Home > Regulation > Bafin looks a bit naked

Bafin looks a bit naked

Germany’s financial regulator Bafin has come to the rescue and banned naked short selling of eurozone sovereign bonds, CDS and 10 leading German financial stocks. It wasn’t a good idea in 2008 and this is one idea that does not become better with age.

According to a recent study on the effects of the short selling bans of 2008, it only makes a bad situation worse. We don’t really need a study to tell us that, it’s only common sense.

We know that markets are not efficient and that investors aren’t rational all the time. Despite what the general public and politicians think, investors are only human! Humans are driven by many more factors than hard cold facts, like emotions.

The classic is central bank’s interest rates decisions. If they lower interest rates quicker than the market expects, everyone panics and starts to wonder what the central bank know about the state of the economy that the rest of the market doesn’t. And since it’s the central bank it must have a lot more detailed information, so they must know something that the rest of the market doesn’t. Usually this isn’t the case.

It’s the same thing with this latest ban. What does Bafin know that we don’t. I’m going to take a wild guess and say – nothing. Guessing again, I think it’s a political move in order to push through the latest bailout package and create a sense of crisis again. The issue is that it is making a bad situation worse.

Firstly, they should have checked with the rest of the eurozone regulators first, to get some coordination, or at least made a call to the French. Christine Lagarde, the French finance minister, was the first leader to go against Bafin. Without a coordinated move it will have very little impact on the market. Deals between non-German counterparties can go ahead as usual.

Secondly, even if the ban was Europe-wide you can always create a naked short through options. Yet again very little impact from a ban.

The only real effect the ban has had and will have is that it has created another reason to take risk off the table and sell the market. In addition, it has withdrawn liquidity from the market and increased the cost of capital. Never a good thing when the economy is sailing very close to the wind.

So, what Bafin is left with is a market that is scared that they know more than what we do. At the same time they’ve managed to alienate the rest of Europe’s regulators and politicians, on the margin possibly making further coordination and harmonisation of the eurozone harder to achieve. Bafin does look a bit naked.

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