Oct. 16 (Bloomberg) -- Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. asked U.S. regulators for a reprieve from meeting higher capital requirements taking effect next year, arguing that lending and the economic recovery would be harmed.

Banks should be given three years to raise capital for offsetting assets and liabilities that must be brought onto their balance sheets, Citigroup Chief Financial Officer John Gerspach said yesterday in a letter to regulators. Requiring banks to “assume the risk-based capital effects immediately, or even over one year, is an undeniably severe penalty,” he wrote.

Regulators including the Federal Reserve and the Federal Deposit Insurance Corp. sought comments on whether to permit a “phase-in” of capital requirements rising under a change approved by the Financial Accounting Standards Board. The rule passed in May eliminates off-balance-sheet trusts known as Qualifying Special Purpose Entities, forcing banks to move billions of dollars of assets and liabilities onto their books.

The capital requirements “will have a significant and negative impact on the amount of consumer-conduit funding that will be made available by U.S. banks,” said the letter from JPMorgan, the New York-based bank that this week reported its biggest quarterly profit since the subprime-mortgage market collapsed in 2007.

“We strongly support a phase-in period for the rule changes,” according to JPMorgan’s letter, which was signed by Managing Director Adam Gilbert. The change would take effect for annual reports after Nov. 15.

‘Crowds Out’

The rule “could lead to the result that every $1 billion of additional capital held from newly consolidated assets ‘crowds out’ more than $15 billion in loans,” Paul Ackerman, Wells Fargo’s treasurer, wrote in a letter yesterday to the Fed, FDIC, Office of the Comptroller of the Currency and Office of Thrift Supervision. The comment period ended yesterday.

“That sort of information will get the attention of politicians, if not the regulators,” said Robert Willens, a former managing director at Lehman Brothers Holdings Inc., who now runs his own tax and accounting advisory firm in New York.

Citigroup, the New York-based bank that yesterday reported a third-quarter profit of $101 million, argued that bringing off-balance vehicles onto its books would lead the bank to cut financing for securitizations that fuel credit-card lending, residential mortgages and student loans. Additional consumer loans will be cut as well, Citigroup said.

“We do not plan to reduce lending in only those businesses specifically impacted by the incremental regulatory capital requirements,” Gerspach wrote.

Citigroup spokesman Stephen Cohen and JPMorgan spokesman Brian Marchiony declined to comment beyond the content of the letters. Julia Tunis Bernard, a spokeswoman for San Francisco- based, also declined to comment.

Pooled Loans

Lenders recorded profits before the U.S. subprime mortgage market collapsed by selling pooled loans to off-balance-sheet trusts, which repackaged them into mortgage-backed securities. Banks sold those securities to other off-balance-sheet vehicles they sponsored, concealing from investors that the securities were backed by deteriorating home loans.

FASB is overseen by the U.S. Securities and Exchange Commission. Its rules aren’t subject to approval by the banking regulators.

To contact the reporters on this story: Ian Katz in Washington at ikatz2@bloomberg.net; Jesse Westbrook in Washington at jwestbrook1@bloomberg.net.

Last Updated: October 16, 2009 14:46 EDT