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Regulating banks is like disciplining your children, says AIG investment chief

Loosened federal regulations are in focus with Donald Trump about to take office, but the financial sector has been in a government-imposed "time out" for far too long, AIG's chief investment officer, Doug Dachille, told CNBC on Thursday.

"The regulation of the banking system was a natural response, because when I think about regulation, it's like disciplining your children, and the financial crisis was like your children doing something really bad," Dachille told "Squawk Box."

Dachille likened the situation to parents coming home to a 17-year-old having burned down their house. A severe response is expected, he said, but a nearly eight-year-long time out becomes excessive and "extremely inconvenient."

The investment chief acknowledged that bad incentives lead to regulatory consequences, like Wells Fargo's illegal sales practices for which the bank paid a $185 million fine in September.

But when the government all but eliminates risk from the financial sector by directing where and to whom big banks can lend, the prospective borrowers who need loans the most, like small businesses, tend to suffer, Dachille said.

He said a loosening of Dodd-Frank, which was the government's direct regulatory response to the 2008 crisis, would encourage banks to lend to those who need it, in turn affecting the Federal Reserve's interest rate policy over the coming years.

"I think you have to really rethink what the path of rate policy will be if you actually have banks willing to lend again," he said, adding that the Fed would probably only raise rates twice in 2017, as opposed to its three-hike projection.

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