Increased regulations are making it tougher on banks and the consumers they serve but easier on the financing system that helped create the 2008 credit crisis, analyst Dick Bove said in his latest broadside against government overreach.
Bove, the outspoken and widely followed vice president of equity research at Rochdale Securities, examined several areas the government targeted in the banking industry and how they failed to achieve their stated objectives.
Instead, he asserts that the new regulations mainly helped what is often referred to derogatorily as the "shadow banking system" — the network of investment banks and other institutions that often move outside the view of regulators.
"It has been my strong belief that the United States government and its agencies have embarked upon a series of actions that have created disarray in every sector of the consumer financial markets," Bove said in a note. "Make no mistake, consumers are paying more for less. Winners will emerge in this period of disarray."
The banking regulations, many contained in the Dodd-Frank regulatory bill, came into being after large Wall Street institutions lost big in their bets on the subprime mortgage industry and plunged the country into the worst economy since the Great Depression. (Read more: Caution on Housing May Cost Obama the Election)
Washington policy makers have sought to curb reckless lending in part by forcing banks to have enough capital to cover huge losses.
At the same time, the Federal Reservelaunched an aggressive easing program in an attempt to lift the economy out of its funk. Those moves have had limited success.
Bove charged that the government lowered interest rates to stimulate growth but instead created an environment in which lending actually contracted, and savers — particularly older Americans — paid the price.
Increasing the money supply through quantitative easing (explain this) — creating money to purchase government debt — failed because banks that received the new funds used the money to buy Treasurys as well, rather than circulate it through the economy, he said.
And attempts to eradicate too-big-to-fail institutions also failed in that they cut the market share of big banks but also caused them to decrease lending.
Bove also faults the government for increasing costs to consumers through higher debt card fees and overdrafts, among other things.
"Free checking has disappeared and banks regularly charge service fees (or high balance requirements) on all customer accounts," he said. "They have also reconfigured consumer offerings to bolster charges. In this way they offset lost revenues from those areas where the government has stepped into the industry. Now everyone gets to pay for the mistakes of a relative few."
Finally, he said traditional banks are being forced out of providing services such as check cashing, wire transfers, payday loans, prepaid bank cards and mortgages with "graduated payment schedules," all services generally associated with lower-income customers.
Unregulated companies in the shadow banking system are likely to fill the void, he said.
"So, who is supposed to provide the funds inside the regulated banking system to buy these loans? Clearly, the answer is the shadow banking market," Bove wrote. "Unregulated mortgage companies are likely to spring back into business. They will have their loans packaged by unregulated securities firms.
"The government is virtually screaming for this to happen with its new rules," he added. "By driving consumers into the grey and shadow banking markets, it will drive the cost of their financial transactions higher. Moreover, it sets the stage for the next financial crisis.
Looking at some of the numbers, there are cases to be made both for and against Bove's arguments.
Consumer credit outstanding has increased about 5 percent to $2.53 trillion since its 2010 lows, according to the latest Federal Reserve data. Revolving credit has fallen while non-revolving has risen.
The latest Fed quarterly senior loan officer surveypresented an inconclusive picture.
"Loan demand from businesses seems to be picking up while demand from consumers remains weak," said Brian Gardner, analyst at Keefe, Bruyette & Woods, a New York-based financial services firm. "On the supply side, banks are easing slightly for business loans, but a significant fraction of banks reported tightening standards for residential mortgages. US banks also indicated that they are benefiting from decreased competition from European banks."
The latter point reinforces something Bove has repeated often — that despite a seemingly hostile government, U.S. banks are going to be the beneficiaries of the European sovereign debt crisis.
Bank-related stocks also have been strong performers this year, with financials the fourth-best performing sector on the Standard & Poor's 500 , returning 16 percent against the broader index's total return of about 13 percent.
Still, Bove remains pessimistic about the outlook, believing that regulators are doing substantial harm with their reform efforts.
"They have not tested their ideas against real world events and they constantly ignore the facts as the global financial markets present them," Bove said. "They write laws and rules in 'white heat' without knowing virtually anything about the industry they are regulating. The result is certain to be more pain for consumers."