The pressure for a ban on bets that bank shares will fall has been building since the spring when HBOS was allegedly targeted by dishonest speculators putting out false rumours.

The spike downwards in the share price created panic for a few hours and prompted the Bank of England to take the unprecedented step of contacting newspapers to settle anxiety.

A Financial Services Authority (FSA) investigation was started but no one was caught. Since then, as bank shares have tumbled, pressure for a crackdown from politicians and lobby groups has intensified.

That pressure increased this week when the reverberations of the collapse of Lehman Brothers came back to haunt HBOS stock with a vengeance. The shares fell by as much as 67 per cent on Monday as an army of traders swept in, some taking bets that it would become the next casualty of the global credit meltdown.

As Alistair Darling called an emergency meeting of the Treasury, the FSA and the Bank of England on Tuesday, a rescue plan for HBOS was top of the agenda. Next was a swift clamp-down on hedge fund speculators.

Sure enough, as soon as the takeover of HBOS was secured, the Chancellor went on the airwaves to say that the FSA needed to do more where short-sellers were concerned, and Gordon Brown announced a “clean-up” of the financial system. Hours later the FSA’s ban, lasting until January 16 next year, was announced.

Mr Darling said: “I believe it is the right thing to do in the current market conditions and in the interests of financial stability.”

Yet hedge funds and other short-sellers argue that they are being demonised for a perfectly legitimate trading activity that helps to make markets more liquid and can help to deflate share price bubbles.

They argue that they are now the scapegoats for the failings of bank managements and regulators. The reason that bank shares have been falling, they say, is that banks’ business models have been exposed as hopelessly flawed. Their bets, they argue, merely hasten the share price back to a new, more rational level.

But the alternative view, now espoused by the FSA and other regulators, is that short-selling of banks helps to generate a panic in which fears of a bank failure become a self-fulfilling prophecy.

No sooner had it announced the decision, however, than calls came for the FSA and Mr Darling to do more.

Alex Salmond, Scotland’s First Minister, who this week attacked “spivs and speculators” for driving down HBOS shares, said: “This move by the FSA is a short-term measure, but we hope that when it publishes its review of the rules on short-selling in the new year, it will make sure that sound financial institutions can never again be destabilised by unscrupulous speculators.”

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