European Banking Union Creates Supervisory Mechanisms
Firm Investment is an international peer reviewed journal of research on financial market concepts and practices. The focus of this peer-reviewed journal is firm growth and expansion as a result of globalization and technical change. The Journal also covers aspects related to management theory, including the concept of financial risk and firm valuation. The Journal also covers the evaluation of alternatives to traditional financial management approaches, and the potential of new technology and approaches to financial analysis and measurement. Drawing implications from international finance theory, this peer-reviewed journal uncovers that international financial leverage is negative and significantly associated with firm failure.
It is also seen that the effect of international financial leveragedness on firm investment across the euro area countries is substantial for small information asymmetric enterprises. These small asymmetric information enterprises include mainly those in the low-income group. The study by Bok-Sanchez and colleagues (2021) found that firms from the low-income group residing in the euro area countries were more exposed to financial risks and less profitable. They argue that the absence of strong domestic policies for bank financing, weak regulatory frameworks for lending, and inadequate infrastructure development resulted in a lack of competition and delayed access to credit. In addition, they state that excessive leverage by banks was another cause of this decline in opportunities.
Another aspect covered in this peer-reviewed journal is the relationship between the European centralised banks and firm investment strategies. It is noted that a number of the recent bank reforms, meant to improve bank supervision, have increased constraints on bank activity and tightened bank supervision on various activities. Most notable among these changes was the introduction of the QE program by the European Central Bank. The authors argue that this led to increased reliance on external funding sources, which have become key players in financing infrastructure projects over the past decade. Furthermore, it led to the increased concentration of bank resources on real estate financing rather than commercial banking activity.
One issue that wasn’t discussed in the report is the relationship between bank supervision and firm investment strategies. In light of the credit crunch and the increased availability of unsecured credit, it has been argued that there are two competing explanations for the increased concentration of bank resources on commercial property. One explanation is that banks are looking to protect their own interests in the run up to the credit crunch, meaning that increased bank supervision may slow or prevent the absorption of new business and output. The other explanation, put forward by the authors, is that increased bank supervision may also be a means to promote better supervision of external financing sources which would be beneficial to firms such as mutual funds and pension funds.
As mentioned above, the recent global banking union agreement between the European Union and the United States provided for more intrusive supervisory measures for all US banks. However, the proposed revisions to the Basel II accord still leave much room for discretion. Furthermore, as noted by Bok-Sanchez and colleagues (2021), increased supervision will only have a limited effect on the banking sector as it will mostly impact those firms operating on a local basis. This is because most local banks are still largely independent of the main global banks.
Instead of relying on a single supervisory mechanism, the authors believe that a multiple regulatory body with wide-ranging powers and duties should be created instead. In their opinion, this would be the most appropriate way to deal with the problem of increasing concentration of banking resources. In a related paper, Bok-Sanchez and co-authoriseees argue that a mixed bag of regulatory instruments is preferable as opposed to a single supervisory mechanism, as this would ensure consistency across the board and provide a better platform for regulators to regulate firms on a competitive footing. The combination of a number of instruments is however not without its own problems, as illustrated by the experiences of some large financial institutions in the United States and the European Union. A better solution therefore lies in a mixture of the best features of a number of regulatory instruments, each serving a specific function to ensure a more balanced and coherent approach to banking supervision in the euro area.
