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Bank Stress Tests Could 'Harm Economy': Bove

NEW YORK (TheStreet) -- The Federal Reserve's third-round of bank stress tests conflict with the central bank's "actions in attempting to stimulate economic growth," according to Rochdale Securities analyst Richard Bove.

Under the Fed's final ruling on its 2012 stress tests published Tuesday, the original group of 19 large U.S. bank holding companies that were subjected to two previous rounds of tests -- including the "big four" of JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C) and Wells Fargo (WFC), as well as U.S. Bancorp (USB), PNC (PNC), Goldman Sachs (GS), Morgan Stanley (MS), and 11 other companies -- will be joined by 12 more bank holding companies with over $50 billion in total assets, including Huntington Bancshares (HBAN), Discover Financial Services (DFS) Northern Trust (NTRS), M&T Bank (MTB), Comerica (CMA), and Zions Bancorporation (ZION).

The 31 bank holding companies subjected to the third round of stress tests are required to submit their 2012 capital plans by January 9, and will have their plans approved or rejected by the Federal Reserve by March 15.

The 2012 tests feature a severe set of economic assumptions for the maximum stress the banks need to be able to survive, while maintaining strong capital ratios and their capacity to lend, including A 4% decline in the U.S. gross domestic product, 13% unemployment, a 21% decline in home prices, and a whopping 52% decline in equity prices.

Bove said that the Fed's test parameters "are directly contrary to its actions in attempting to stimulate economic growth," and "the conflict is so severe that it raises the question as to whether the Federal Reserve understands the impact of bank regulation on monetary policy."

The point is that while attempting to stimulate the economy by growing the money supply, the Fed -- while putting on its bank regulatory hat -- forces the banks to hold so much extra capital for a rainy day, that the new money pumped into the economy won't be lent out to business that could expand and hire workers, but instead will be deposited with the Fed itself.

To illustrate this point, Bove points out that the Federal Reserve's total assets increased by 218% from Sept. 2007 to Sept 2011, while banks insured by the Federal Deposit Insurance Corp. saw their combined balances sheets expand by nearly 9%, their cash expand by 173%, and their equity increase by 19%, while loan balances declined nearly 5%.

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