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

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 steps in. The biggest beneficiaries of this perverse cycle remain the banks that are deemed “too big to fail” or TBTF, many of whom acquire the choicest of the failed bank’s assets for pennies on the dollar. Consider the fact that JP Morgan stands to earn an IRR of over 20 percent on the assets that it acquired when the First Republic Bank entered the FDIC receivership.

This brings us to the crux of the matter. In light of today’s volatility in PacWest shares, JP Morgan’s CEO has called for an outright ban on short-selling in bank shares.

Specifically, Jamie Dimon believes that people who short a particular bank’s stock and then spread panic on social media platforms in order to drive down that bank’s share price should be prosecuted.

Interestingly, the federal authorities are also looking into short-selling as one of the causes behind the collapse of the Silicon Valley Bank (SVB) a few weeks back. Of course, the Federal Reserve does not seem to think that short-selling was a major factor behind the collapse of SVB, as illustrated by the fact that the label “short seller” is mentioned only once in its own 118-page report on the failed bank.

Earlier today, PacWest announced that its deposits declined by 9.5 percent in the week that ended on the 05^th of May. Ever since this disclosure, the bank’s stock has been under severe pressure. In this environment, a ban on short-selling, as proposed by Jamie Dimon, only serves to highlight the gravity of the situation and might as well accelerate the deposit outflow. Moreover, a ban on short-selling, even if implemented, is unlikely to work as the long positions in the target stocks are much more likely to get liquidated amid the ensuing panic.

Do note that the FDIC is slated to make a major announcement today. Short of a comprehensive system-wide deposit insurance scheme, the banking crisis will continue.

About the author: Writing is my one incontrovertible passion. Over the past six years, he has authored over 2,200 distinct articles on financial and tech-related topics, spanning nearly 1 million words. And he has been a member of Wcctech mobile team since 2025. As an alumnus of the University of Toronto, Rotman Commerce Program, I bring nuance, in-depth knowledge, and a unique perspective to every topic that I cover. When I'm not writing, I'm traveling the world, exploring hidden confectionaries and restaurants as an aspiring food connoisseur.

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