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We live in stress-testing times

The Federal Reserve is expected to publicly reveal the results of stress tests performed on 19 US lenders on Thursday after markets close.

The tests are designed to home in on the financial institutions that would require more capital in the event of a more severe and prolonged economic downturn. However, they have also managed to draw a wide level of criticism from industry experts.

That criticism has been headlined by billionaire investor Warren Buffett who reportedly said the US government was right to try and save the banks but warned the tests would not give a true picture of the industry’s health as they ignored differences in business models.

Despite this knock, banking stocks have continued on an upward curve in recent weeks with bull-minded investors seemingly optimistic that the outcome of the tests will be better than expected.

Indeed the FTSE 100 index climbed as high as 4,374 in morning trades today with banks attempting to catch up on gains made on Wall Street during the UK’s bank holiday repose.

But according to Gartmore multimanager head Tony Lanning, there is a challenge ahead for managers in deciding what to do after the rally.

He says: “We’re still overweight in the US but we’ve been taking some profits off the table. My gut feeling is the market can’t go up 25 per cent in a month without pausing for breath.

“The aggressive rotation you’ve seen out of defensive sectors in the UK has been made to fund the rotation into cyclicals but I’m not sure how much longer that’ll run for, it’s a bit of a trash rally. The UK economy still looks pretty horrid. It’s very clear people have been chasing cyclical stocks and there’s a question mark over whether that’s a sustainable rally.”

Meanwhile in international news, yesterday President Barrack Obama announced further proposals to crackdown on offshore tax dodgers designed to generate a badly needed £139bn income over the next decade.

In a joint announcement with Treasury secretary Timothy Geithner, Obama pledged to close tax loopholes, change rules which would enable US firms to defer taxes on overseas profits and crack down on global tax dodgers. He also announced plans to hire an army of 800 new Internal Revenue Service agents to seek out tax evaders.

The proposals would rule out some tax deductions for firms that earn profits in low tax rate countries as well as track down wealthy US tax cheats who park money in offshore centres such as the Bahamas or the Cayman Islands.

Amidst this backdrop, the recently “grey-listed” British Virgin Islands kicks off its three-day annual Caribbean conference for the society of trust and estate practitioners in Puerto Rico.

Among the topics to be discussed at the conference are the role of international finance centres in the global economy and the impact of initiatives driven by the US and the OECD.

BVI based offshore law firm Walkers partners Chris McKenzie believes the tax neutrality created by offshore financial centres can help smooth the wheels of the world’s economy and says the conference will highlight the legitimacy of such jurisdictions.

He says: “We have very robust anti-money laundering regulations in all of the offshore jurisdictions that collaborate in organising the conference. We have much better regulations offshore than some jurisdictions such as France which hasn’t even implemented two of the EU anti-money laundering directives and yet they are ironically our biggest opponents.

“It’s quite difficult for politicians to speak in our favour as they’re opponents come down on them like a tonne of bricks because we’re an easy target. We are used as a scapegoat but there is no empirical evidence that we were responsible in any way for what’s gone wrong in the financial crisis. What went wrong is lack of regulation in the onshore centres and we’re rather the victims than the creators of the problem.”

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