Pent-Up Shorts Ravage Regional Banks

Regional bank stocks took a nosedive on Thursday as the short-selling ban was lifted and pessimistic comments regarding the sector continued to hang in the air.

The Keefe Bruyette Regional Bank index slumped nearly 7% to 58.22, while the NYSE Financial Sector index fell 3.5% to 4703.51 on Thursday, after the ban on short sales for more than 800 financial companies put in place Securities and Exchange Commission expired at midnight Wednesday. The SEC extended the ban on short selling to Oct. 17, but the ban's deadline was moved up to yesterday after President Bush signed the Emergency Economic Stabilization Act last week.

The New York Times also reported that the Treasury Department is considering taking equity stakes in U.S. banks to re-instill confidence in the financial system.

"The market seems to be differentiating between the companies that have capital and have gotten capital and those that have not yet gotten it and need it," says Matt Shields, a bank stock trader at FIG Partners in Atlanta. "The shorts have been biting their chops here."

Shares of KeyCorp (KEY Quote) were falling 18%, Fifth Third Bancorp (FITB Quote) was dropping 11%, Regions Financial (RF Quote) were off 14% and Sovereign Bancorp (SOV Quote) plunged 18%. On the other hand large-cap bank stocks such as Bank of America (BAC Quote) and JPMorgan Chase (JPM Quote), as well as the trust banks including Bank of New York Mellon (BK Quote), Northern Trust (NTRS Quote) and State Street (STT Quote) were all in the black for the most part Thursday.

Regional bank stocks were under additional pressure, after Friedman Billings Ramsey published an industry note this morning suggesting that commercial loan losses are expected to accelerate and "potentially exceed, historical peak losses over the coming quarters."