Tags: Bove | Federal Reserve | bank | collateralized loan obligations

Bove: Fed Is the Problem When it Comes to CLOs Under Volcker Rule

By    |   Wednesday, 09 Apr 2014 10:51 AM

The Federal Reserve has given banks a two-year reprieve from an element of the Volcker Rule that would essentially force them to sell their collateralized loan obligations (CLOs).

But that only enhances risk in the financial system, says bank analyst Dick Bove of Rafferty Capital Markets.

"They are the problem," Bove tells CNBC, referring to the Fed. "Basically, what they're doing is asking the banking system to sell $100 billion-plus 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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But risk won't be reduced, because the CLOs will merely be acquired by hedge funds, pension funds, life insurance companies, etc., he notes.

Plenty of buyers will emerge. "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 argues.

"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," he explains.

"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 states.

"So what they're doing makes little sense from any perspective."

Rep. Scott Garrett, R-N.J., agrees with Bove's opposition to the rule.

"Whether it is today or two years from now, this rule will force small and large banks to needlessly write down or hold a fire sale of these performing assets, potentially creating huge bank losses and making our financial system less safe and less sound," he said in a statement released before the Fed announced the delay.

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The Federal Reserve has given banks a two-year reprieve from an element of the Volcker Rule that would essentially force them to sell their collateralized loan obligations (CLOs). But that only enhances risk in the financial system, says bank analyst Dick Bove of Rafferty Capital Markets.
Bove, Federal Reserve, bank, collateralized loan obligations
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2014-51-09
Wednesday, 09 Apr 2014 10:51 AM
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