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$16B Bet Against Europe Banks

Updated: Apr 2, 2023

The recent collapse of Greensill Capital’s supply chain finance fund (SCFF) has had a ripple effect across the global financial markets, with investors scrambling to reassess their exposure to high-risk assets. This has led to increased short selling activity in European banking stocks, as investors bet against these financial institutions in anticipation of a market downturn.


Bridgewater Associates, Millennium Management, and Marshall Wace, among others, have all increased their short holdings in European banking stocks following the collapse of the SCFF. As of Tuesday, short sellers had accumulated negative wagers on European banks worth more than $15.7 billion.


Which institutions had the highest Loan Percentages?

According to a recent report by IHS Markit, some financial institutions have a higher percentage of shares on loan to short sellers than others. Handelsbanken, Mediobanca, BNP Paribas, Credit Suisse, Close Brothers, and Deutsche Bank were among the banks with the most significant percentage of shares on loan to short sellers.

Between March 10 and 14, the 113 lenders studied by the researchers witnessed an average rise of 5% in shares out on loan. This indicates that short sellers are increasingly targeting European banks in anticipation of a market downturn.


What happened to Credit Suisse's shares?

Credit Suisse has been particularly hard-hit by short selling activity, with traders betting against the bank gaining up to $238.6 million in month-to-date profits and $192.4 million in year-to-date profits. The bank borrowed up to $54 billion from Switzerland's Central Bank to help bolster its liquidity and restore investor confidence.


By 1602 GMT, its shares were up 18%, while the broader European banking index was up 1.4%. This suggests that Credit Suisse's efforts to shore up investor confidence may be working, at least in the short term.


However, Credit Suisse is not the only European bank facing short selling pressure. In fact, the collapse of Greensill Capital has led to a widespread panic across the European banking sector. Around 120 billion euros got wiped off the value of European banks, as investors rushed to sell their holdings in anticipation of a market downturn.


The panic began when Greensill Capital was forced to sell a portfolio of bonds at a loss to fulfill the demands of its clients who wanted to withdraw cash. This raised concerns of a liquidity crisis at other financial institutions, leading to a sharp sell-off in European banking stocks.




Diversification and Risk Management

The collapse of Greensill Capital highlights the importance of diversification and risk management in the financial sector. Investors who had exposure to the SCFF suffered significant losses when the fund collapsed, underscoring the importance of a well-diversified portfolio.


Similarly, the increased short selling activity in European banking stocks highlights the importance of risk management. Financial institutions must be proactive in managing their risks and ensuring that they have adequate liquidity to weather any market downturns.


The Road Ahead

The collapse of Greensill Capital has had a significant impact on the global financial markets, and the fallout is likely to continue for some time. European banks, in particular, are facing increased short selling pressure, as investors bet against these institutions in anticipation of a market downturn.


Financial institutions must be proactive in managing their risks and ensuring that they have adequate liquidity to weather any market downturns. Diversification and risk management are key to success in the financial sector, and investors must take steps to ensure that their portfolios are well-diversified and adequately protected against market volatility.


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