Tags: Bove | regulators | banks | monoline

Bove: Regulators Making Huge Mistake in Going After Big Banks

By    |   Friday, 14 February 2014 11:54 AM

U.S. regulators are doing everything they can to weaken big, multi-product banks, and it's likely to end in disaster, says star bank analyst Richard Bove of Rafferty Capital Markets.

"Virtually every major country in the world has a highly concentrated banking industry populated by multi-product banks," though the U.S. banking system is much less concentrated than those of the other biggest industrialized nations are, he writes in a commentary for CNBC.

"There are sound financial reasons as to why the global banking system has evolved in this manner. Simply stated, despite periodic flare-ups, these systems work best."

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Monoline financial companies, which focus on one area, don't thrive long-term, Bove argues. That's why you see few or no publicly held mortgage banking companies, credit card companies and big commercial lenders.

"Small monoline-like banks are following the same path. They have the same protections as the big multiline banks but these small banks keep going away," Bove notes, adding that no new banks have opened in the last three years, the longest span in U.S. history.

So why have the monoline companies perished?

"First, they only have one major revenue source and when this business hits a cyclical setback, monoline companies cannot recover," he explains. "Second, and actually more important, these companies cannot obtain funding in high-interest-rate environments and/or periods of depressed economic activity."

The big multiline banks avoid both problems, Bove contends.

"They have multiple revenue sources so that at least some business is always functioning well in bad times. They always have access to funds irrespective of cyclical swings."

So history teaches that big, multiline banks are best, but U.S. regulators are ignoring that lesson, he maintains.

"They are reducing the size of and attempting to eliminate the biggest multiline banks, and they are bringing back the small unregulated monoline financial companies."

At the pressure of regulators, banks have dumped a slew of operations, including insurance, brokerage and asset management businesses, trading businesses and student lending, Bove contends.

"The regulators are pursuing a theory that ignores the growth of profits and the need for positive cash flows. They care little if they force banks to divest businesses that generate profit."

In doing this, regulators are encouraging the formation of monoline financial companies, such as hedge funds that only buy loans and payday loan companies, Bove says.

So regulators are crippling the companies best able to withstand financial shocks, while boosting companies that aren't well-structured to withstand financial shocks, he writes.

The regulators are setting the stage for catastrophe. "They are insuring that the next financial crisis whenever it develops will result in a massive depression."

Matt Taibbi of Rolling Stone takes a stance diametrically opposed to Bove, arguing that big banks have too much operating room.

"Banks like Morgan Stanley, JPMorgan Chase and Goldman Sachs own oil tankers, run airports and control huge quantities of coal, natural gas, heating oil, electric power and precious metals," he writes.

"They likewise can now be found exerting direct control over the supply of a whole galaxy of raw materials crucial to world industry and to society in general, including everything from food products to metals like zinc, copper, tin, nickel and, most infamously thanks to a recent high-profile scandal, aluminum."

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U.S. regulators are doing everything they can to weaken big, multi-product banks, and it's likely to end in disaster, says star bank analyst Richard Bove of Rafferty Capital Markets.
Bove,regulators,banks,monoline
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2014-54-14
Friday, 14 February 2014 11:54 AM
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