Shares in US regional banks bounced back on Friday, although concerns about the health of the sector have left investors nursing steep losses for the week.

The rout began in March with the collapse of Silicon Valley Bank, followed by the toppling of Signature Bank and then First Republic last weekend. Some regional lenders are struggling to cope with the sharp rise in interest rates enacted by central banks in an attempt to tame inflation.

On Friday morning, PacWest shares rose 49%, while Western Alliance gained 31%, Zion rose 15% and First Horizon 5%. However, all four banks are still trading significantly lower than a week ago, with PacWest shares worth half as much as last Friday, wiping more than $600m from its market capitalisation. Western Alliance is trading 35% down, having lost $1.4bn in value.

Nonetheless, the partial recovery buoyed US stock markets, and oil prices also rose.

The crisis had threatened to deepen as hedge funds bet shares would fall further.

Friday’s rally came after Reuters reported that US officials were assessing whether “market manipulation” caused the recent volatility.

The White House has vowed to monitor “short-selling pressures on healthy banks”, and the American Bankers Association has urged federal regulators to investigate a spate of significant short sales of banking stocks.

Neil Wilson, of markets.com, said regulators might consider introducing a ban on short selling to “buy time” amid the sell-off. He said: “There may need to be a ‘whatever it takes’ line in the sand moment – clearly the US authorities haven’t done that – it may be that a ban on shorting bank shares forms part of that. Remember, this bank stress is just on being the wrong side of rates; we’ve not even had a recession or full credit cycle.”

Comparing the turmoil to the short selling that played havoc with shares at GameStop, the video games retailer, in 2021, Jaret Seiberg, an analyst at the investment bank TD Cowen, said: “We believe the banks are having their GameStop-like moment, where social media is amplifying non-traditional approaches to assessing solvency. This creates a self-fulfilling prophecy that pressures stock prices, which then leads to more questions.”

Russ Mould, the investment director at AJ Bell, said: “Markets will always look for the weakest link and then attack it if the mood takes them. It can be a self-fulfilling prophecy. Shares go down, people pull their money out and the hedge funds pile in.”

Mould said UK banks looked insulated from the crisis for now but added that there were lingering concerns. He said: “The UK banks are looking over their shoulder at what’s going on in the US. At the moment, the risk to UK banks looks extremely limited. The US has thousands of regional banks which are not subjected to stress tests.”

On Thursday, Western Alliance slumped after strenuously denying a Financial Times report that it was exploring a potential sale.

PacWest had sought to calm markets on Wednesday, saying it was in talks with several potential investors after its shares fell 60%. However, traders were not reassured, and the stock fell further on Thursday.

Earlier this week Jamie Dimon, the boss of JP Morgan, played down the risk of a spiralling banking crisis after snapping up First Republic.

The pound hit an 11-month high against the dollar, at $1.263, on Friday morning as fears over prospects for the US economy gripped markets. However, strong US jobs market figures erased some of those gains.

The fall in the dollar against the pound came after the US Federal Reserve voted to increase interest rates to a 16-year high on Wednesday, despite fears over the impact of the banking crisis on the wider economy.

In the UK, the Bank of England is expected to raise interest rates next Thursday, to 4.5%, with the markets now pricing in one additional increase before the end of the year.