Large banks are crafting their strategy to get regulators to back off from tough talk that they may force the riskiest firms to hold twice as much capital as smaller banks.
The bankers' new offensive comes ahead of several meetings of international regulators set up over the next few weeks with the hope of having a capital buffer proposal in July, according to a person familiar with the talks.
The regulators are deciding how much extra capital the biggest firms, whose failure would do the most damage to financial markets and the economy, will have to hold above the agreed-upon Basel III framework calling for a minimum of 7 percent capital.
Big banks have been bracing for a buffer that could add as much as 3 percentage points, for a total of 10 percent.
Federal Reserve Governor Dan Tarullo raised the ante last week when he said the Fed is considering an option where the largest banks may have to hold between 8 percent to 14 percent in total capital.
That shocked the banks and sent them scrambling for a way to fight back.
It certainly got our attention, said one industry lobbyist.
Banks will be launching a multi-prong attack to exploit the range of capital hawk and dove regulators, and to convince lawmakers that it's a bad thing for America to have banks sitting idly on capital.
The regulators do listen to what folks do on Capitol Hill, said Wayne Abernathy, a top official at the American Bankers Association. They are accountable to the people's representatives.
The industry faces two significant obstacles.
One, big banks are still wildly unpopular after the 2007-2009 financial crisis that forced a $700 billion taxpayer bailout. A key example came on Wednesday when bankers lost a vote in the Senate to postpone a severe reduction in how much they can charge for processing debit card transactions.
Two, it's hard to sex up Basel III capital standards to lawmakers.
When you do mention Basel, your average member of Congress thinks 'that pairs well with tomato and mozzarella,' said a banking executive.
The banking executive, who asked not to be named so as not to inflame the capital debate, said the industry is going to hammer home four messages to lawmakers and regulators:
* Holding capital hostage will hurt the struggling economy because it will mean fewer loans at a time when lending is already depressed.
* Requiring massive capital buffers is an admission by regulators that last year's Dodd-Frank financial reform law does not accomplish its goal of reducing risk.
* If banks have to hold on to capital instead of making loans, borrowers will turn to the shadow banking sector that has little to no oversight.
* Tough U.S. standards will hobble banks against international competitors, making the United States a less desirable place to do business.
Banks are unsure if Tarullo's suggestion of an extreme 14 percent capital level truly represented where the Fed is headed, or was a scare tactic that will be scaled back.
A person familiar with the approaches being contemplated by regulators said Tarullo was laying out one theoretical scenario, and the Fed has been supportive in the Basel process of an additional requirement for the largest banks in the 3 percent range.
A look at big banks' current capital shows there's a lot at stake. For a graphic of their capital levels please see: http://r.reuters.com/jer99r
Of the six biggest U.S. commercial banks, Bank of America would likely have to do the most to raise its capital ratio, according to estimates from investment firm Keefe, Bruyette & Woods.
BofA's capital ratio is 4.5 percent, KBW calculated, using new Basel III measurement methods.
Citigroup's ratio is 5.4 percent and JPMorgan's 6.2 percent, KBW estimates. U.S. Bancorp has the highest ratio of the six, at 7.4 percent.
In the stock market, banks have taken a beating in recent weeks in part because higher capital standards would reduce profits.
The public got a high-octane preview of the pushback earlier this week when JPMorgan Chief Executive Jamie Dimon challenged Fed Chairman Ben Bernanke about regulatory collateral damage at a televised banking conference.
Has anyone bothered to study the cumulative effect of all these things? Dimon asked. Bernanke said that's not possible given how many changes have been made.
The rare public exchange got Wall Street cheering.
You need a voice like that to say, 'Enough is enough,' said Christopher Mutascio, a bank analyst at Stifel Nicolaus. He was spot on. My only question is what took him so long.
Going forward, bankers' pleas to regulators will mostly be behind closed doors and may seek to play regulators off each other.
Bank officials said they were heartened by a speech Monday by U.S. Treasury Secretary Timothy Geithner who said other financial system reform measures that have been taken reduce the amount of extra capital big banks should have to hold.
Geithner's comments have raised the question of whether Treasury will pressure the Fed and other regulators to temper their proposals or continue to let them take the lead.
Frederick Cannon, bank analyst at Keefe, Bruyette & Woods, said it's tough to say who has right on their side -- regulators keeping a tight leash on banks that played a major role in the financial crisis, or the banks who say they're being held back from helping heal the American economy.
On scale, the Fed has the upper hand. On the overall regulatory environment on the banks, Dimon and the bankers have the upper hand, Cannon said.
(Reporting by Dave Clarke in Washington and David Henry in New York, Editing by Gary Hill)