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Colin McLean: why the banking sector is attractive again
by Colin McLean on Nov 21, 2012 at 11:51
The severe impact of deleveraging, as banks cut back their loan books, is already threatening growth. If the UK government needs any further warning on how bad this could get, France is showing how rapidly an economy can shrink when deleveraging really bites. That is not a scenario Britain needs.
And when banks are being encouraged to shrink, telling them to lend does not work. Banks can be given gross lending targets but net lending falls as loans are quietly called in.
That leaves politicians with just one route to economic growth and re-election: they must reduce the pressures on banks. Cutting the sector some slack seems to be the way in which the conflicting challenges of regulation and growth are resolved.
There are signs politicians are resisting calls from regulators and central banks to raise the bar even further for banks. For banks with assets to sell – such as RBS with its Citizens Bank or Lloyds’ interest in St James’s Place – improving their balance sheet is easier.
We can expect more discussion about flotations and disposals, meaning despite the high-profile fines and political rhetoric, life may get easier for banks, with less appetite for rapid deleveraging.
Politicians might recognise what eventually has to be done about the sector, but much of that will be years down the line. Getting banks to lend again is what matters.
Our leaders will set emotion aside and focus rationally on their own election prospects. This means banks, at current valuations, are attractive, despite the uncertainties around.
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