Fears over hedge funds short selling bank shares have prompted frantic activity in the corridors of Westminster.

The Financial Services Authority removed the ban on short-selling on financial stocks last Friday, and there are strong concerns the change prompted the recent fall in British banks’ share prices.

Since the reintroduction of short-selling, the Royal Bank of Scotland share price has fallen 70 per cent – although it has suffered from the announcement of a possible £28 billion loss and the government taking a 70 per cent stake.

Barclays has dropped 50 per cent, Lloyds Banking Group has fallen 57 per cent, and HSBC has fallen six per cent.

Concerns about the effect on the markets forced Treasury committee chairman John McFall to write an open letter to Hector Sants, FSA chief executive, today, asking what he believes the effect to have been.

“In the light of the extreme market turbulence in bank shares in the week since the ban was lifted, could you please confirm that the Financial Services Authority is actively monitoring the connection between the volatility in bank shares and the repeal of the ban on short selling,” it reads.

“I am particularly concerned given that I have heard disturbing anecdotal evidence that some hedge funds have been shorting stocks in UK banks. To this end, could you also please confirm that you will not hesitate to re-introduce the ban if it is found that short selling has contributed to the undermining of stability in the banking sector.”

An FSA spokesperson refused to comment to politics.co.uk about the letter today, but stressed the safeguards put in place when the ban was lifted.

Firms engaged in short selling are under an obligation to inform the FSA of their activities, and only “one or two” incidents have been reported since Monday.

The FSA is also prepared to reintroduce the ban at a moment’s notice, and without consultation.

But certain hedge funds made good use of the ban’s end on Friday, with some analysts saying the massive drop in certain banks’ share prices could be traced back to action.

Lansdowne Partners admitted shorting Barclays shares on Friday, when the bank lost a quarter of its value.

Liberal Democrat economics spokesman Vince Cable said he understood why there would be calls for the City watchdog to reintroduce the ban.

“While short-selling remains a problem in this highly volatile market, this is a very sensible step to take,” he said.

The Treasury committee is holding an evidence session with representatives of hedge funds on January 27th.