U.S. banks ask SEC to expand stock trade protection

By John Poirier

WASHINGTON (Reuters) - An emergency move by U.S. securities regulators this week aimed at curbing manipulative short-selling in some major financial firms should be expanded to all publicly traded banks, or it could erode confidence in the banking industry, a top trade group said.

A letter from the American Bankers Association to the Securities and Exchange Commission this week stressed that banks could be vulnerable as they are suffering from the financial turmoil stemming from the downturn in the U.S housing market.

"The emergency order could further exacerbate a loss of confidence in the safety and soundness of this country's banking industry," ABA President Ed Yingling said in a Thursday letter to the SEC.

"As the commission is aware, it would be an understatement to say that short interest in financial services companies has greatly increased over the year," Yingling said.

On Friday the SEC, the U.S. markets watchdog, amended its action from earlier in the week but limited the protection to 19 firms including U.S. housing finance giants Fannie Mae and Freddie Mac whose shares plunged on concerns they were undercapitalized.

The rule also applies to the stocks of 17 Wall Street firms, primary dealers that have access to the Federal Reserve's discount window, such as Citigroup Inc (C.N: Quote, Profile, Research) and Lehman Brothers LEH.N.

Short selling is a legitimate strategy where the investor arranges to borrow shares they consider overvalued and sell them in hopes of profiting when the price drops. A naked short occurs when an investor sells stock that has not yet been borrowed.

Wall Street, which was thrown off guard when the SEC announced the emergency rule on Tuesday, and U.S. stock exchanges applauded the rule modifications and guidance. But the ABA wanted the SEC protection expanded to all banks and their holding companies that are publicly traded.