US authorities are now looking into whether big investment firms are targeting, or attacking, otherwise healthy banks to make a profit.
Federal and state officials are assessing whether "market manipulation" caused the recent volatility in banking shares, Reuters is exclusively reporting.
The White House had vowed to monitor "short-selling pressures on healthy banks".
Short-selling is a complex trading strategy but, in short, it is one way investors — including hedge funds — can profit from a fall in the value of a stock.
There has recently been a sharp increase in short-selling.
It has coincided with extraordinary falls in the share price of several regional US banks — including First Republic, PacWest and Western Alliance – by as much as 50 per cent in one day.
White House press secretary Karine Jean-Pierre said the Biden administration was closely watching the situation, but any possible action would be taken by the US market regulator, the Securities and Exchange Commission (SEC).
"The administration is going to closely monitor the market developments, including the short-selling pressures on healthy banks," Ms Jean-Pierre told a White House briefing.
Earlier this year, several US banks — including Silicon Valley Bank — collapsed as an aggressive US Federal Reserve interest rate tightening cycle made their investments, which are used to fund their deposits, loss-making.
Bank runs ensued
It appears US authorities are not just worried about short-selling targeting stressed banks but healthy ones too.
Consumer Bankers Association president and chief executive Lindsey Johnson stressed that the banking industry remained strong and urged policymakers to call out "unethical behaviour by activist investors" who were taking advantage of market volatility.
"This volatility is being fuelled by emotion and misinformation that does not reflect the strong underlying fundamentals of our banks," Mr Johnson said in a statement.
Local market watchers say there is big money to be made from the US banking crisis.
"Do you think that the hedge funds are done with this strategy? Of course not," financial markets analyst, Henry Jennings, wrote for the newsletter Marcus Today.
"Pick a regional bank and target it. Every US regional bank has a target on its head. It is easy money.
"It is the Harry Kane of Hedge Fund trading at the moment."
Mr Jennings went further, suggesting anti-US sentiment might be behind some of the market volatility.
"There are plenty of anti-American hedge funds out there in the world and like nothing more than seeing the US suffer," he wrote.
"The game is on. Hunting season is in full flight.
"If a US bank looks even the slightest bit wounded, the aggressive hedge funds will go for it.
"Currently attacking the US regional banks is an easy tap in. It will continue.
"Saving one just puts a target on all the others. And there are many others."
The SEC first warned investors in March — during a period of high market volatility surrounding the collapse of Silicon Valley Bank and Signature Bank — that it was carefully monitoring market stability and would prosecute any form of misconduct.
It is clear that some investors are making money from targeting stressed banks.
"Short sellers are profiting handsomely by attacking specific banks that are showing signs of weakening fundamentals and deposit outflows," Jamieson Coote Bonds analyst James Wilson told the ABC.
