U.S. banks are arguably broke thanks to Federal Reserve and other government policies: they don't lend nowadays, the key characteristic of broken financial institutions, says Dick Bove, vice president of equity research at Rochdale Securities.

Higher liquidity requirements, controls on bank services, low interest rates that reduce profitability and other regulations are preventing lending, Bove says.

"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," Bove tells CNBC.
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"Moreover, there is zero indication that the banking regulators and/or Congress understands that this has happened."

The problem isn't loan demand.

Dick Bove (Rochdale file photo)

"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," Bove says

"In essence, the mechanism for converting money into loans is broken."

The Federal Reserve has said it will sell short-term government bonds and buy $400 billion in longer-term debt in an effort to keep interest rates low, a move dubbed Operation Twist by the markets since it twists the numbers around on the yield curve and that latest monetary recovery tool.

Still, some say Operation Twist won't work, as interest rates are already low.

"This is not a situation where people are saying, 'gee, I really want to buy that house but interest rates are too high'," says Frank Sorrentino, CEO of North Jersey Community Bank, according to CNNMoney.

"Rates are already at historic lows and over the last six to nine months, we have not seen loan demand go up."