Investors eye curbs on bank short-selling

A pedestrian passes Halifax and Bank of Scotland signs, in the City of London on September 17, 2008.

LONDON (Reuters) - A consortium of large UK institutional investors is discussing measures that might be taken to tackle the impact of short-selling in banking stocks, two fund management industry sources said on Wednesday.

One source familiar with the talks said the discussions were likely to lead to an open letter aimed at convincing the government and the Financial Services Authority to examine whether tighter restrictions could be placed on short-selling in Britain, particularly in the financial sector.

Another source, who is directly involved, said: "Because of the impact in banking, where confidence is so important for the function of the franchise, there is a real danger that the viability of perfectly sound businesses is being brought into question by share price movement alone."

"We are talking to a lot of other institutional shareholders, and some of those have got calls into the authorities and we are trying to talk specifically to the advisers to some of the banks," the source said.

Other major investment firms said they were unaware of any letter having been sent as of late Wednesday.

The FSA has already placed disclosure restrictions on anyone short-selling companies involved in rights issues.

The talks have taken place in the wake of confirmation that Britain's biggest home loan lender, HBOS, has entered into takeover talks with Lloyds TSB.

HBOS stock has fallen for six consecutive days on mounting fears about its funding position, and speculators have been blamed for driving the shares down by aggressive short selling.

Short sellers, often hedge funds, sell borrowed shares in the market in the hope of buying them back more cheaply at a later date.

HBOS fell under the gaze of the FSA in March when the regulator launched an investigation to discover whether short sellers had been behind false rumours of liquidity problems.

(By Raji Menon; additional reporting by Joel Dimmock; editing by Ted Kerr and Carol Bishopric)