The largest U.S. banks, gearing up for another battle with regulators, say a Federal Reserve plan designed to prevent the need for bailouts during a crisis includes measures that could hurt the economy by damping credit.

The Fed’s proposal that systemically important banks boost their ability to withstand severe losses “contains a number of requirements that are counterproductive or unnecessary,” five financial-industry lobby groups said in a letter released Monday. A requirement that lenders accumulate long-term debt — a key element of the plan — should be eliminated, the groups said.

The “excessive requirements” will increase borrowing costs for the banks, including JPMorgan Chase & Co. and Bank of America Corp., “which in turn may increase the cost of credit to the market and run a risk of reducing the amount of credit available to the economy,” the groups said.

“We believe that the proposal is needlessly complex and stringent,” Greg Baer, president of the Clearing House Association, said Monday during a call with reporters. At the same time, he praised its importance, calling it “truly the last piece in the puzzle” to make banks resilient and resolvable.

Extreme Duress

The measure on total loss-absorbing capacity, or TLAC, which Fed Chair Janet Yellen has called an important step in addressing the too-big-to-fail problem, would require the banks to hold debt that could be converted into equity if they came under extreme duress. It is, along with stress tests and tougher capital requirements, among the key actions U.S. and global regulators have taken to try to prevent a repeat of the 2008 financial crisis. The actions have been viewed by many U.S. officials, lawmakers and even the banks as an alternative to breaking up the biggest financial institutions.

The lobby groups said they “strongly support imposing a properly structured and calibrated TLAC requirement” that would help end the risk of too-big-to-fail bailouts.

The proposal was released in October and opened to public comment through Feb. 19. The industry comment letters were signed by the Clearing House, the Securities Industry and Financial Markets Association, the American Bankers Association, the Financial Services Roundtable and the Financial Services Forum.

Reconstituted Company

Under the Fed’s proposal, the banks would need debt and a capital cushion equal to at least 16 percent of risk-weighted assets by 2019 and 18 percent by 2022. If U.S. banks were to fail, stock investors would lose everything, but the debt would be converted into equity in a reconstituted company. It’s an element of the so-called living wills lenders are required to submit to the Fed and Federal Deposit Insurance Corp. each year to map out how they could be resolved after a collapse. The idea is that when a bank fails, regulators would have a war chest to fund a new, healthy version of the company without having to use taxpayer money.

The lobby groups sent the Fed a 151-page letter focusing on the U.S. banks — which also include Citigroup Inc. and Wells Fargo & Co. — and a separate 56-page submission on how the proposal would affect the U.S. operations of foreign banks. The Financial Stability Board, a group of global regulators that makes recommendations to the Group of 20 nations, proposed a rule similar to the Fed’s in November.

The other U.S. banks covered by the rule are Goldman Sachs Group Inc., Morgan Stanley, Bank of New York Mellon Corp. and State Street Corp.