Capital Eyes on the Market – Thursday 21st February 2013

We take a look at some of the recent activity and events taking place in the UK and globally. For a more in-depth insight into how things may impact on your own financial planning priorities, please do get in touch. Enjoy a financial conversation as part of your regular financial planning review at SewellBrydenGunn.

Long Term Care Fees Funding – UK Government has proposed a lifetime Cap of GBP£75,000. This has been met with a mixed response.
EU imposes greater curbs on bank bonuses since 2008. A clear majority of member states in Europe are seeking to push ahead with stricter limits on bonuses that exceed salary in an effort to prevent the bonus issue holding up reforms of bank capital rules…..
Some banks currently use short time period data to allow smoothing of the impact of crises in the markets when calculating or looking at how much capital they should be holding against risk -VAR. Longer time period data includes the wild market swings of the 2008 financial crisis therefore giving rise to a higher capital requirement because of the volatility experienced at that time. Regulators want to standardise that time period in bank models to somewhere between two and five years of data although nothing has been finalised yet. The Basel Committee on Banking Supervision is currently looking at standardising this requirement which would effectively give the result from a calculation point of view that some banks are undercapitalised while others are overcapitalised until the whole process has had time to settle down. Clearly harmonising some of the inputs to this critical calculation is a good thing……

HSBC has reported that it is planning to jettison it’s final salary scheme for all employees although pensioners’ benefits will be protected. The bank plans to close its defined benefit (DB) pension fund from next year for all existing members. Under the plan, active members will no longer be able to build up benefits after 30 June 2014. It is planned that any future provision would be built up in a defined contribution scheme (essentially money purchase) but this would not affect the benefits of pensioners and deferred members of the DB scheme and efforts would be made by the board of trustees to ensure that benefits already built up in the scheme for all members would be protected. HSBC has already closed its arrangement to new employees in 1996. Many companies have given up trying to maintain a DB scheme due to increased longevity and poor investment returns which have added cost pressures. HSBC is currently consulting with employees and representative bodies on the new proposals and will announce the outcome of this consultation late in 2013……..
The risks of an immediate crisis in the Eurozone appear to be much reduced but the currency’s survival is by no means certain. While this is the case the possibility of renewed stress in the economy remains. The decline of interest rate spreads across economies within the Eurozone gives a good indication of revised confidence. Would member states join the Eurozone all over again if they were given the choice? Clearly some countries would take a deep breath and decide to keep their own currency. However it remains the case that now that they’re all in it together and indeed are tackling the issues “as one”, the future does look like it holds some tangible solutions to what is undeniably difficult territory for many of the non core Eurozone members, and the will by all member states to make it all work is more easy to see than perhaps it was just a year or so ago. So why should we in the UK care? For one, the UK is now inextricably linked to all things Euro, even down to the way in which basic bank payment systems work now and will work under new SEPA rules due to commence in the next year. Our link to the global economic engine runs alongside the Euro factory and although financially the UK and Euro markets can be seen as separate entities, in reality they represent interwoven and interdependent economic and industrial activities. The success of the Euro including future budgetary arrangements does indeed impact on the UK both directly and indirectly. All in all, we may feel the battle is far away, but we should nevertheless continue to keep watch, lest the “fair winds turn foul”……….

The Bank of England Monetary Policy Committee has considered further quantitative easing. Although only three members of the nine strong committee voted for it this month, one of the three was Sir Mervyn King, governer. Investors had hoped rate setters would desist from further such activity. However the prospect of further gilt purchases pushed sterling still lower against the dollar and to its lowest level against the euro in more than a year…..

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