US analyst warns against punishing banks

Banking reforms being driven through by the US government could force the country into a recession, according to analyst Dick Bove.His warning follows news that the Federal Housing Finance Agency is to sue 17 banks over sub-prime mortgage lending, including Royal Bank of Scotland, Barclays and HSBC.The US government is working on a series of measures to reduce systemic risk in the banking industry, including larger capital requirements and the limiting of proprietory trading.But Bove told CNBC that US politicians were acting without regard to the effect their actions were having."At one point the four largest banks in the United States had 50% of the assets of the banking industry, and the government wants to break up those banks," said Bove, vice president of equity research at Rochdale Securities. "The government doesn't want those banks to exist in that fashion any longer. It wants to see a spreading of, if you will, the risks across the banking industry."He argued that traditional banks that make smaller, safer loans were being rewarded while more aggressive lenders were being punished, despite being key to helping the economy grow."The fact of the matter is it doesn't seem to care what it's doing to the economy," he told CNBC. "Removing credit progressively from the United States economy (is) going to force this recession to occur.""Because the government views its goals and its actions to be beneficial to the system over the long term, it does not care what the short-term impacts will be," Bove wrote in a research note. "If the economy must slow and unemployment rise so be it; the government is not going to stop until it achieves the goals it wishes to see implemented."