The Impact of the 2011 Short-Sale Ban on Financial Stability: Evidence from the Spanish Stock Market

We examine the effect of the 2011 short-selling ban on Spanish stocks on the financial sector's risk level. Before the ban, short positions were positive and significantly related to several indicators of bank default risk. Subsequently, the ban moderated the risk of banking institutions, especially those more exposed to short-seller activity, which, on average, showed higher levels of maturity mismatch, uncertainty about their fundamentals, and exposure to sovereign risk. The ban also caused a side effect on non-financial firms, since it led to an increase in their exposure to short sales, reflecting the existence of a common aggregate risk factor.