Lenders Losing Battle of ‘Basel’

By Victoria McGrane and Dan Fitzpatrick

The Federal Reserve is expected to embrace a new global framework that requires giant financial institutions to hold extra capital, said people familiar with the situation. The central bank’s decision to accept the rules laid out by regulators in Basel, Switzerland, as part of a draft proposal that could come before Christmas is a defeat for giant U.S. banks that argued the guidelines needn’t be so strict. They contended the Basel approach could prompt them to reduce lending and hurt the economy.  At the same time, it isn’t clear the bigger capital buffers will accomplish what regulators set out to do in the Dodd-Frank financial overhaul and other recent moves: end the “too big to fail” syndrome that paved the way for the government bailouts of the 2008-09 financial crisis. Some bank executives and some other critics feel regulators around the world have focused too much on constructing new rules for them while ignoring their nonbank peers. Regulators have been suffering from a “myopic focus on banking organizations,” Karen Shaw Petrou, managing partner of advisory firm Federal Financial Analytics Inc., wrote in a recent report. It is equally important, she said, to impose new rules on “shadow banks,” or giant nonbank financial firms that pose similar risks to the financial system. Regulators keep saying, “we sure need to get to that, but until we do, the shadow sector just gets stronger and stronger,” Ms. Petrou said in an interview.