Supervisory Architecture and Banking Union Relative Effects on Firm Investment Growth
Recent study by the International Finance Research Institute in Munich, Germany shows that firms with higher level of credit scores enjoy more firm investment than others. The study draws insights from various agency concepts, namely firm analysis, financial sector, bank financing, and financial service industries. It’s also seen that financial leveragedness of firm is significantly and negatively correlated with firm investment.
The research finds that supervisory improvements tend to reduce overall firm investment, but not all, and only for large banks. It is then suggested that banks should become more cooperative to boost bank supervision. Financial experts suggest that effective supervisory measures should be combined with improved bank supervision to improve the external environment for banking unions. The analysis shows that bank supervision improves bank risk taking capacity. This results in higher savings for borrowers and, at the same time, reduces bank risk and enhances firm investment.
The paper goes on to state that increased supervision of banks also leads to higher levels of firm investment due to improved supervision of credit risk. However, it is proposed that this is offset by costs of centralised bank supervision. The paper goes on to suggest that regulation of credit risk is an important aspect for consideration in strengthening the economy.
The paper examines four aspects of the supervisory architecture of European firms. The first aspect examines the differences in the way firms in the euro area are supervised. The second aspect focuses on the differences in regulatory policies between the US and the UK. The third aspect discusses the ways in which regulatory policies impact on corporate decisions making capacity and the level of firm investment. The fourth and last aspect examines the relationship between supervisory architecture and bank supervision.
In a previous study by van Zuiden and Voll, the same group of researchers explored the relationship between the growth of bank lending and the growth of finance and investment across different countries in the euro area. They did not focus on the role played by the centralised bank supervision. Their previous research on this issue suggested that increased bank supervision is correlated with lower levels of bank lending, but did not explore the link between supervisory architecture and bank supervision in particular. The present study extends the literature on the subject by exploring the impact of the different supervisory arrangements across the four countries examined in their analysis.
Conclusions drawn from the present research indicate that overall, the present era of bank supervision is effective in counteracting the financial crisis. However, the current arrangements are insufficient in providing the necessary guidelines or instruments for effective supervision of firms across the euro area. The increasing concentration of banking assets in the hands of too many banks limits their ability to properly supervise activities and, as a result, risks being taken by creditors and borrowers. There is a need for a closer examination of the relationship between supervisory architecture and bank supervision in light of the recent bank lending reforms and the effects these will have on the future functioning of finance and economic policy.