I have noticed that many European Banks try to convince their clients to accept loaning their stocks and bonds to the bank itself. My online bank offers interest in exchange for loaning assets, I have never accepted because the Bank can relend to other banks, and I don't know what risks there are. Many clients accept the offer because the banks guarantee restitution of these assets. Could you explain the risks behind these operations? Thank you

Eoin Treacy's view

European regulators responded to the credit crisis in a number of ways but one of them was to ban naked short selling. In other words, before traders can short a stock they first need to have posted the same quantity of shares as collateral. This is designed to minimise “failure to deliver notices”.  Bank stock lending departments have grown substantially as a result of these regulations and they have had to incentivise their clients to allow manipulation of their inventory in order to meet demand. 

Among the risks included in allowing your shares to be lent out are that the eventual counterparty will not be able to meet margin calls and defaults on the arrangement and that the bank does not pass on a “fair” portion of the profits from the arrangement. Your voting rights are relinquished when you lend out your shares, so you would lose your say in how the company is managed. Additionally by facilitating shorting, you might be contributing to volatility or lower returns.