Washington policy makers have broken the back of the US banking system and don't even know it, analyst Dick Bove said.
As the Federal Reserve has embarked on its latest effort to stimulate the economy, Bove, the vice president of equity research at Rochdale Securities, said the central bank instead has further sapped banks' ability to bring about needed growth.
"In essence, the mechanism for converting money into loans is broken," the widely followed analyst wrote in a research note for clients. "The reason that it is broken is not lack of loan demand although that is certainly part of the decline in loans. The system is broken because of the concerted attack on it by the government—a government that is committed to breaking the hold of the banking system on the U.S. economy."
At the conclusion of its meeting Wednesday, the Fed announced the widely anticipated Operation Twist program.
In the coming months—concluding in June 2012—the central bank will sell $400 billion of the shorter-dated notes it owns and buy an equal amount of longer-dated debt. The goal is to drive down borrowing rates and get banks to loan and stimulate business activity.
However, Bove points out the Fed already has printed enough money so that banks have about $1.6 trillion in reserves, accumulated since monetary easing began in 2008. Yet loans from large banks actually have fallen by $84 billion during that same period.
He cites a variety of reasons for why big banks aren't lending: Higher liquidity requirements; extremely low interest rates that have reduced lending profitability; a flatter yield curve that limits the profits banks make on loans; price controls on bank services; and regulations that otherwise have hurt banks.
"The combination of these factors has effectively removed banks from the lending process. Thus, they are not performing their function to convert monetary ease into economic growth," he said. "Moreover, there is zero indication that the banking regulators and/or Congress understands that this has happened."