NEW YORK ( TheStreet) -- Financial reform meant to provide relief and opportunity for small banks and shrink large banks will actually foster a wave of consolidation in the industry, according to bank stock analyst Dick Bove. The role of taking issue with government policy is a familiar one for Rochdale Securities's Bove, who told clients in a research note Wednesday that Congress is contradicting itself on reform when it comes to the small banks. "If the regulators do what Congress has mandated, the new law will drive these companies to sell their businesses or simply fail," Bove says. "It is creating a significant opportunity for bank acquirers to buy small banks at distressed prices and forming accretive deals." Bove's primary concern centers around eliminating trust preferred securities -- a primary source of funding for small banks -- as a legitimate capital source. Small banks will have to look elsewhere for capital sources as existing trust preferred securities mature, he writes.
But Bove also has a problem with the new annual stress tests meant for banks with less than $50 billion in assets. It will likely have "very stringent requirements concerning commercial real estate," Bove writes. "This will hit the smaller banks hard since they tend to be relatively larger lenders to this part of the economy than to, say, consumers or businesses." Bove believes smaller banks could get squeezed since they will be phasing out the use of trust preferred securities in their capital ratios, even as the standards are going up. "The small banks will not get the money they need," he says. "If I am wrong and they do get the money it will dilute the ownership position of the current holders of the stocks. These owners are far more likely to want to sell their stock than sit back and be diluted." Banks facing this choice will fuel the next round of M&A, Bove believes.