The stress isn’t over yet: talk of a return to normal banking is misplaced

http://www.theguardian.com/business/2014/oct/27/ecb-banking-stress-test-uk-equality-women

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Not too tough, not too lenient. That was broadly the market response to the European Central Bank’s stress tests on 123 of Europe’s commercial banks. Enough banks failed the tests to give the exercise credibility, but enough passed to provide reassurance that the sector is on the mend. All four UK banks passed, although the narrowness with which Lloyds did so led to a 2% fall in its share price. Cue talk of the long-awaited return of normal banks and normal banking.

Such talk is, at least for the moment, misplaced. While the initial response to the stress tests has been positive, there are four good reasons to be wary.

The first is that the tests were not as stringent as they might have been. As the economist Philippe Legrain noted, Germany’s Sparkassen savings banks, which collectively have more than €1tn (£790bn) in assets, were not part of the exercise. The ECB also took it on good faith that many of the residential mortgage assets of German banks are properly valued. Legrain’s point is that the ECB seemed to single out less important banks in smaller European countries for censure while letting bigger countries – Germany, most notably – off the hook.

What’s more, some of the scenarios look a tad optimistic. The ECB assumed inflation of 1% this year, 0.6% in 2015 and 0.3% in 2016. Inflation currently stands at 0.3% and, with the eurozone economy slowing, there is a real risk of deflation. That would makes debts more expensive to service and be extremely unwelcome to many of the banks that were given a clean bill of health by the ECB.

The second reason to be cautious about the return of normal banking is that the supply of credit from properly functioning banks is only one part of the equation. If – and it remains a big if – banks are well capitalised enough to extend loans to customers who need them, then that is undoubtedly welcome. But there also has to be a demand for credit, from businesses and consumers. And that demand simply isn’t there at present.

For UK banks, there is a third reason to wait before getting into the party mood. That is the knowledge that they are being subjected to the Bank of England’s own stress tests, the results of which will be published just before Christmas. To pass these, banks will have to show that they could cope with an increase in unemployment to 12% and a 35% peak-to-trough fall in house prices. For a bank like Lloyds Banking Group, the biggest UK mortgage lender, that is not going to be easy.

Last but certainly not least, there’s the question of what constitutes a normal bank. Here the test should not just be whether the bank is paying a dividend to its shareholders, but whether it holds enough capital to be able to survive anything bar a complete global financial meltdown – but not so much as to impair lending to growing businesses. That happy day still seems some way off.

Inequality in the UK

Every year since 2006, the World Economic Forum has published a report and league table charting how much is being done to ensure gender equality in the workplace. Progress so far has been glacial: on current trends it will take more than eight decades to close the gender participation and opportunity gap.

Britain stood at ninth in the rankings in 2006, but has been falling steadily ever since and has now dropped outside the top 20 for the first time. The WEF said that the UK had been flatlining on gender equality while other countries had been improving. Britain lags behind the pace-setters for female-friendly workplaces: Iceland, Finland, Norway, Sweden and Denmark. Nicaragua, Rwanda and the Philippines make the WEF’s top 10. Britain doesn’t.

There are plenty of reasons for Britain’s relatively poor performance: women are under-represented in managerial positions, in the boardroom, at Westminster and round the Cabinet table in Downing Street. Despite equal pay legislation, women still earn significantly less than men for doing the same job. Childcare is expensive. Companies pay lip service to gender equality, but feel under no real pressure to change.

It’s not hard that to see what needs to be done. Getting serious about gender equality requires money, political will and a different set of priorities. It means state-funded childcare. It means more generous paternity rights. It means trade unions that organise and bargain collectively in low-pay sectors of the economy. It means quotas for women in parliament. And it means forcing companies to publish details of how many women they have in senior positions and how much they are paid relative to their male colleagues. Put simply, if Britain wants to be up there with the Nordic countries it has to be more like a Nordic country.