WASHINGTON (Reuters) - The largest U.S. banks are accusing the Federal Reserve of attempting to misuse its new regulatory powers to shrink financial giants under the misguided belief that "big is bad."
Lobbying groups representing the big banks are pushing back against a set of proposed rules the Fed issued in December to more closely scrutinize the firms and rein in their risk taking after the 2007-2009 financial crisis.
In a letter sent Friday, the groups said the Fed is going too far and is proposing a set of policies on credit exposure and capital standards that go against the intent of the 2010 Dodd-Frank financial oversight law.
"We submit that an approach grounded in a 'too big' or 'big is bad' concept is not only contrary to Congress' intent but is misguided and detrimental to a sound, strong banking system and a strong economy," the groups wrote.
The letter precedes a meeting next week between Fed Governor Daniel Tarullo and the CEOs of large banks, including JPMorgan's Jamie Dimon, according to a person familiar with the plan.
The meeting was scheduled to talk about the Fed's annual stress tests on the banks. The banks may try to press him on other issues including their qualms with the December proposal for managing large banks.
The letter was written by The Clearing House Association, the American Bankers Association, the Financial Services Forum, the Financial Services Roundtable and the Securities Industry and Financial Markets Association. Comments on the December proposal are due Monday.
The Dodd-Frank law requires the Fed to write rules for overseeing bank holding companies with more than $50 billion in assets to ensure they are not engaging in risky activities that could threaten the financial system.
The groups said the Fed "has set a course," however, to use these new powers "to achieve indirectly what it was not authorized to address directly - that is, precipitate a dramatic reduction in the size of large banks through size-based regulation."
Collectively the lobbying groups represent the largest U.S. banks, including Citigroup Inc (C.N), Bank of America Corp (BAC.N), JPMorgan Chase & Co (JPM.N), Goldman Sachs Group Inc (GS.N) and Wells Fargo & Co (WFC.N).
The salvo against the Fed is the latest example of tension over whether there are too many large banks whose potential failure poses a grave threat to the larger financial system.
Dallas Fed President Richard Fisher has taken a more extreme position, recently proposing breaking up the five biggest U.S. banks.
Tarullo, who has been the central bank's point man on regulation, has been more moderate.
He has never publicly called for breaking up the largest banks. But he has spooked the industry by questioning whether banks can get so big that any future growth does not provide value, through economies of scale, to the financial system or economy.
"It is possible that a firm would need to be quite large and diversified to achieve these economies, but still not as large and diversified as some of today's firms have become," he said in a September speech calling for more study of the issue.
In their letter, the groups argue that allowing banks of all sizes benefits the economy and that the largest institutions can provide services their smaller competitors can not.
"In the 21st century, companies served by international banks compete in a global economic system, exporting finished products, importing raw materials and components, and establishing substantial operations abroad," the groups wrote. "They need banks that are competitive around the world and are able to meet quickly and efficiently a wide range of financial needs."
The 161-page letter gets deep into the details of the rule and of particular concern to the banks is a Fed proposal to limit the credit exposure of big banks to a single counterparty as a percentage of the firm's regulatory capital.
The credit exposure between the largest of the big banks would be subject to an even tighter limit. A bank with more than $500 billion in consolidated assets could not have a credit exposure of more than 10 percent to another bank of that size.
The letter calls this proposal "unrealistic and one-dimensional" and that, among other things, it miscalculates the threats posed by exposure to derivative markets.
The groups also contend the Fed has offered no explanation for why the 10 percent threshold is necessary.
Reporting By Dave Clarke; Editing by Andrew Hay