Despite increased short-selling of consumer-lending banks and finance companies, overall short interest in bank stocks plummeted in the month ended Jan. 15, as arbitragers covered some huge short positions on banks that completed acquisitions.

Bank-related short interest on the New York Stock Exchange and the American Stock Exchange fell 16.6% to 146.4 million shares in the period.

The three biggest declines in short position were in banks that completed deals, analyst Carole Berger of Salomon Brothers pointed out.

The short position in PNC Bank Corp., which bought MidLantic Corp., declined by 27.7 million shares. The short position in First Union Corp. fell 5.8 million shares, as the Charlotte, N.C., bank bought First Fidelity Bancorp. And the short position in Nationsbank Corp. fell by more than 3 million shares, probably reflecting the completion of its deal with BankSouth.

Short interest is the outstanding volume of shares sold short - that is, borrowed and promptly sold. Traditionally, short-sellers are betting that a stock price will fall, enabling them to cover their positions with cheaper shares.

Today, however, sophisticated investors with an eye on making money from mergers have embraced a strategy of short-selling the shares of acquirers and buying shares of their prey.

Together PNC, First Union and Nationsbank more than accounted for the 29.1 million share decline in bank-related short interest reported by the two exchanges.

Merger-related arbitrage aside, analysts said that a recent deterioration in consumer credit quality appears to have spurred short- selling of consumer-oriented banks and finance companies.

The short position in Capital One Financial Corp., the Richmond, Va., credit-card company, ballooned by 355% - the largest percent gain in the group. Also in the top 10 in percent gain were consumer lenders MBNA Corp., Dean Witter Discover & Co. and Mercury Finance Co.

Analysts attributed a 1.8 million share increase in Citicorp's short position to the view that the company is vulnerable to consumer credit problems.

Short-sellers apparently were disappointed when Citicorp's earnings statement Jan. 16 reflected only slight deterioration in credit quality. The company's shares gained $4.75, probably reflecting a scramble to cover short positions in the stock, said Lawrence W. Cohn of PaineWebber Inc.

Despite the big decline, PNC's remaining short position of more than 14.2 million shares remained the largest in the industry. Short-sellers may believe the bank will announce a larger than expected merger charge later this month, said one analyst.

The analyst, who requested anonymnity, also noted rumors that investor Warren Buffett has been selling his stake in the Pittsburgh bank. If those rumors are confirmed in regulatory filings due next month, the analyst said, it could prompt a drop in PNC's share price.

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