The Fed just increased risk, Dick Bove says

Fed has increased risk: Dick Bove

The Federal Reserve has given banks two more years to shed risky loans banned by the Volcker Rule, but analyst Dick Bove says the move does nothing to solve the larger problem of preventing another financial crisis and only increases risk.

"They are the problem," Bove said of the Fed. "Because basically, what they're doing is they're asking the banking system to sell, you know, a hundred-plus billion dollars' worth of these securities and then they're telling the banking system that we don't want you to make those types of loans anymore."

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Richard Bove of Rafferty Capital Markets.
Jin Lee | Bloomberg | Getty Images

The Fed said banks will now have until July 21, 2017, to conform their ownership interests in the collateralized loan obligations (CLOs), which pool together risky loans. Forcing the banks to sell CLOs does little to reduce risk, though, because these risky loans will simply be purchased by hedge funds, pension funds, life insurance companies and the like, Bove said Tuesday on CNBC's "Squawk on the Street."

"There are a wide variety of potential buyers of this type of debt. It's just that the buyers and the creators of this type of debt are no longer going to be part of the regulated system," Bove said. "So we've increased risk in the system by taking away regulation because we didn't take away the demand and we didn't take away the money that's out there available to meet that demand."

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To Bove, banning any type of loan, regardless of how risky it may be, hurts liquidity.

"Basically, the government is directing capital flows inside the banking industry through to the economy and they're doing it to harm the private sector in the sense that they're cutting off one source of funding for the private sector," Bove said. "So what they're doing makes little sense from any perspective."

Given the banking sector boasts earnings at all-time highs, with 17 straight quarters of year-over-year earnings increases, the regulations have had little effect on the banks' profitability, too, he noted.

"All of this activity related to regulation in the banking industry have not hurt the banks. It's hurt the people in the economy. It's hurt consumers. It's hurt businesses. It's hurt the government. It basically has not hurt the banks."

Disclosure: Bove covers Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase and Wells Fargo, but does not personally own any shares.

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