NEW YORK – The biggest U.S. banks are extending less credit amid a faltering economic recovery, and regional lenders are stepping in to fill the gap.

Total loans at the four largest U.S. banks – JPMorgan Chase & Co., Bank of America, Citigroup and Wells Fargo – fell 4.9 percent to $3.04 trillion in the first quarter from the same period in 2010, according to data compiled by Bloomberg.

Meanwhile, lending by the 17 smallest of the 24 firms in the KBW Bank Index increased 9.8 percent to $1.27 trillion.

The big banks are trimming assets to satisfy stricter capital rules and regulatory demands to dispose of risky loans, while regional lenders, most less than one-tenth the size of JPMorgan, are picking up customers.

That could mean lower earnings and profitability for the largest firms, said David Trone, an analyst at JMP Securities in New York.

“They’re deliberately shrinking their size, but that has earnings implications,” Trone said. The removed loans have “been identified as high-risk, but actually they’re paying off at par and they’re high interest-rate loans. People think they’re just running off impaired loans that aren’t paying, and that’s not true.”

That regional banks have taken up some of the slack is encouraging to David Jones, a former economist at the Federal Reserve Bank of New York and president of the Denver consulting firm DMJ Advisors.

“It’s the health of the banking system and the banks’ ability and willingness to extend credit that’s at the heart of any recovery,” Jones said. “If anything helps in getting this recovery going, it’ll be those regional banks.”

Boosting capital

The four companies, considered systemically important financial institutions globally, are facing a surcharge on top of capital requirements adopted last year by the Basel Committee on Banking Supervision that will be phased in by 2019.

And the need to hold more capital is leading some banks to reduce loans.

The four banks held 41 percent of the $7.41 trillion in loans reported by the Federal Deposit Insurance Corp. at the end of the first quarter, compared with 43 percent as of the end of March 2010, when the total was $7.5 trillion.

Bank of America CEO Brian Moynihan has sold more than $50 billion in assets to boost capital and simplify the firm since taking over in 2010.

The company has scaled back in credit-card and home lending – which inflicted more than $50 billion in losses and impairments since the financial crisis – as it focuses on the most profitable customers and cuts assets that regulators deem risky.

The bank’s 8 percent decline in outstanding card loans to $112.6 billion in 2011 was the biggest among the top 10 U.S. issuers, according to the Nilson Report, an industry newsletter.

Citigroup, led by CEO Vikram Pandit, has sold more than 60 businesses and reduced assets by at least $600 billion since 2008.

It posted a 10 percent decline in credit-card lending in North America and reduced loans in Citi Holdings, a division Pandit created for unwanted assets including toxic mortgages, by more than half, according to company filings.

Slowing growth

Last June, JPMorgan Chief Executive Officer Jamie Dimon pressed Federal Reserve Chairman Ben Bernanke about whether regulators have gone too far reining in the U.S. banking system.

He asked whether the central bank had studied the cumulative effect of capital requirements, mortgage standards and other rules, and whether those will constrain credit and slow economic growth.

Moynihan at Bank of America said last year that every percentage point of additional capital required by regulators reduces potential bank lending by $18 billion. A spokesman declined to comment.

Fed officials in late Junecut their estimates for 2012 gross domestic product growth in the U.S. by half a percentage point, noting that the rate means demand is too weak to achieve full employment by 2014.

Last month, payrolls rose less than the most-pessimistic forecast in a Bloomberg News survey, and the jobless rate rose to 8.2 percent from 8.1 percent.

Picking up the slack

The situation has created an opportunity for regional banks, which have increased credit-card and other consumer loans.

“A few large money-center national, international banks had a lot of the market, and a relatively small percentage decrease in their portfolio holdings translated to a lot of dollars for smaller banks like us to go out there and add,” said Daniel Cantara, executive vice president of commercial banking at Buffalo, N.Y.-based First Niagara Financial Group, the 21st largest U.S. lender by assets.

U.S. Bancorp, Fifth Third Bancorp in Cincinnati and BB&T Corp. in Winston-Salem, N.C., have boosted residential mortgage loans since the first quarter of 2010, according to bank filings.

U.S. Bancorp, the seventh-largest U.S. lender by assets, had $38.4 billion in mortgage loans at the end of the first quarter, 45 percent more than in 2010, while Fifth Third’s portfolio rose 36 percent to $12.5 billion. BB&T’s residential mortgage loans jumped 39 percent to $21.5 billion.

Banking bifurcation

Meanwhile, Wells Fargo, JPMorgan and Citigroup have all bolstered their commercial and corporate lending.

Wells Fargo’s $345.7 billion in commercial loans at the end of the first quarter was 16 percent higher than the first quarter of 2010. Citigroup’s corporate loans jumped 42 percent to $228 billion in that time.

The biggest lenders are focusing on large transactions because they provide higher returns, said Jim Dunlap, director of regional and commercial banking at Huntington Bancshares in Columbus, Ohio

“We’re finding some larger institutions less focused on that particular work, because to compete, they have do it on price,” Dunlap said.

“It takes the same amount of effort if it’s a $20 million loan or a $200 million loan. That’s why you’re seeing the bifurcation now. They need a much higher return on effort.”