The U.S. needs more big banks, not less, if it is going to remain a world power and avoid the fate of some debt-laden European countries, analyst Dick Bove said.
In his latest broadside against efforts to split up the nation's largest financial institutions, Bove said the dollar is at risk of losing its standing as the world's reserve currency. That would mean foreign creditors could demand that the nation pay its more than $15 trillion of outstanding public debt immediately.
Conversely, growing the banking system and unleashing big institutions "to use the tools they have developed" will protect American financial interests globally.
"In doing so, the biggest American banks will aid the growth of the American economy and protect American prosperity," said Bove, the vice president of equity research at Rochdale Securities. "The problem is the United States does not want this. It is shrinking its big banks.
"It is using every political technique it can muster to reduce their profits and profitability. It is on a vendetta to curtail banking activity."
Indeed, the drumbeat has intensified to break up the so-called too-big-to-fail institutions that helped precipitate the financial crisisand necessitated a massive federal bailout.
Dallas Federal Reserve President Richard Fisher has led the charge, reasoning that the largest banks have only gotten bigger since the crisis and continue to pose a major threat to the American economy. Bank of America , Citigroup and JPMorgan Chase have been mentioned as possible targets to split up their commercial and investment banking divisions.
Bove's banking analysis is widely followed on Wall Street, which stays attuned to his buy and sell ratings on the sector. He is currently bullish on banks in general.
But Bove countered that the presence of big banks is important for the US to maintain its position on the global stage, particularly in light of how much debtthe government continually issues to fund its deficit spending. He points out that of the 21 primary dealers for U.S. Treasurys, 14 are foreign banks. In 1974, those institutions were exclusively American.
He reasoned that the European Union and nations such as China and Japan have more people and more currency afloat than the U.S. As global population grows, the American regime will face numerous challenges for currency supremacy.
"The biggest benefits that the United States gains from having the global reserve currency is that this nation has never really had to concern itself with its budget or trade deficits," Bove said. "Unlike other countries that overspend and then must develop systems to pay back what they borrowed, the United States has never had to worry about this problem. It simply prints money and uses the printed money to pay its bills. No other nation in the world is allowed to do this."
But if the U.S. banks continue to fall behind their global competitors the dollar's standing as the global currency could suffer, hampering the ability to print more dollars to fund debt. Bove envisions riots on par with those in Greece if the U.S. is forced into austerity measuresbecause it cannot keep printing money to pay its debts.
While the scenario may sound extreme, Bove insists that action must be taken. Mostly, he recommends to "build huge banks in America" so they can continue to spread dollars around the globe.
The current regulatory and political climate, though, is tilted against the big banks.
"No thought is being given to the fact that these policies will kill the dollar as the world’s reserve currency," Bove said. "This is more than simple isolationism. It is a direct attack on the health and prosperity of this country by those most responsible for protecting it."
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