Jamie Dimon isn't the only one who's cranky.

The JPMorgan Chase & Co. chief executive's scolding of Federal Reserve Chairman Ben Bernanke had broad support among bankers reeling from a re-defeat on the Durbin amendment and renewed anxieties about the Consumer Financial Protection Bureau. With "300 rules coming," as Dimon lamented, there are plenty of things for bankers to hate.

But amid the slurry of proposed rulemaking and comment letters is a more substantial push to rein in the biggest banks than anything seriously discussed since the early months of the Obama administration.

The real threats have nothing to do with the CFPB's leadership, capping interchange fees or running stress tests, though these subjects have polarized Washington and the industry for months. They are instead the ones aimed at increasing funding costs and capping outlets for leverage.

"The mood of Dodd-Frank ended up being punitive and reactionary, and every minor slight to the industry becomes a major offense because of where it's coming from," said Cornelius Hurley, director of the Morin Center for Banking and Financial Law at Boston University. He argues that the fractured nature of Dodd-Frank has forced big-picture leverage and funding cost policies to be released in a scattershot fashion while relatively minor consumer banking prohibitions blow up into flashpoints.

"If you go back to the original Obama plan, you probably would have started moving toward the bank utility model sooner," he said.

The swan-song paper of Federal Reserve Bank of Kansas City President Thomas Hoenig, which last month advocated a severance of bank lending and capital markets activities, was a reminder of the limitations of the current push. Though it is inconceivable that such an overarching response could emerge from Dodd-Frank regulation, big-bank capital buffers on top of Basel III, derivative restrictions and the Federal Deposit Insurance Corp.'s asset-based insurance assessments all chip away at systemically important banks' funding advantage.

The FDIC's switch in February from deposit- to asset-based insurance assessments was the first concrete step, shifting the costs toward "too big to fail" institutions, which by definition would be steered away from the standard FDIC seizure process. Though the change caused temporary indigestion in the repurchase markets, however, it was not large enough to significantly dent the big-bank profitability or the ultimate size of their balance sheets.

Other regulatory efforts potentially could.

At a Columbia University Law School event on Saturday, Annette Nazareth, a former Securities and Exchange Commission market regulation director, argued that the "living will" requirement of Dodd-Frank could amount to more than an exercise in disaster preparedness. Plans on how to unwind banks will inevitably lead regulators to demand ring-fencing of assets, she suggested, blocking bank subsidiaries from piggybacking on their parent's low cost of capital.

More broadly, a closely watched speech of Fed Gov. Daniel Tarullo this month openly contemplated the use of leverage restrictions to drive the biggest banks out of high-risk business lines.

Even doubling the 7% capital base requirement under Basel III would be insufficient to offset the benefits giant institutions derive from cheap funding, Tarullo said. And though the Fed did not intend to use capital requirements to attack big banks on moral-hazard grounds, he made it clear that the Fed considered handicapping their leverage as a welcome side effect.

"There is little evidence that the size, complexity and reach of some of today's SIFIs is necessary to realize achievable economies of scale," Tarullo said. Firms that disagree, he said, would be welcome to conclude that "the additional SIFI capital charge may be worth absorbing."

Though few believe that the Fed would seriously propose a 14% capital requirement on the big banks — even a 3% additional buffer is generally viewed as draconian — the speech was a warning that the Fed doesn't intend to cut the big banks a break in order to preserve their advantage on capital. If Tarullo's approach guides the Fed's capital requirement thinking, entities like JPMorgan Chase will have a far bigger problem on their hands.

And there are other less developed risks that they will have to contend with, too.

Last week Treasury Secretary Tim Geithner advocated for an international push to raise margin requirements and centralize clearing of derivatives, steps that would hem in leverage.

Further, the imminent departure of acting Comptroller of the Currency John Walsh raises uncertainty about whether his successor might weaken preemption powers. Strong preemption is an important regulatory asset for large banks that seek to operate as uniformly as possible across multiple states.

The capital and leverage issues matter the most in terms of financial stability and taxpayer protection, said Lawrence Baxter, a Duke law professor — and former Wachovia Corp. executive. He argues that other regulatory issues, such as the interchange fee cap, have obscured the underlying issue of "too big to fail."

"The way the politics is framed now has led to everyone talking past each other," he wrote in an email to American Banker, expressing sympathy for Dimon's argument of excessive regulation while at the same time advocating for aggressive capital and leverage control. "The complexity of the regulations is becoming counterproductive. Maybe even making the situation worse."

Hurley agreed that the trend in regulation had veered away from directly confronting "too big to fail."

"Bankers should thank their lucky stars for the taxpayer subsidy leftover after Dodd-Frank," he said, citing the continued support that the credit ratings of the biggest banks still enjoy.

But there is still a price to be paid, he said, as a fractured regulatory system ends up addressing capital and leverage restrictions by default.

"It's not history repeating itself, because the history I'm talking about never happened," he said.


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