Supervisory Architecture and the Working Paper of Banking Union

Financial Theory is a branch of economics that studies the relationship between money and firm investment. The study uncovers the fact that financial Leverage is negative and substantially associated with firm investment. It is also seen that the effect of financial Leverage on firm investment is highly dependent on a high level of information asymmetry among high information asymmetric firms in particular. This is primarily because of the fact that firms with a higher level of inter-dependence tend to use more financial assets to compensate for the lower level of inter-dependence. It has been found out that the optimal level of financial Leverage is quite high where financial assets are used as a substitute for firm fixed capital.

Firm Investment

Financial Theory also studies the relationship between fiscal policy, centralised banking and firm investment. A perfect correlation is observed between fiscal policy and centralised banks. However, changes in fiscal policy may alter the elasticity of prices of fixed assets. Also, changes in centralised banks’ interest rates may affect the evaluation of financial assets. Financial Theory therefore provides a macroeconomic analysis of selected sectors such as economy, finance, industry and banking.

In addition, it looks at the role of banks in the economy. The analysis also reveals the importance of banks in holding the firm investment decisions. It explains why banks play a crucial role in the economy and provides recommendations on how banks can improve their supervisory function and improve the results of bank supervision. The working paper of the UK Bank of England shows that the existence of a regulatory body provides adequate supervisory strength and this body can be strengthened by improving the current supervisory framework.

The analysis indicates that the current supervisory architecture of the European Union (EU) should be compared and evaluated to other international comparisons. It founds out that there is an increased concentration of bank supervisors towards finance, asset management and mergers and acquisitions in the euro area countries. The analysis also indicates that firms in the euro area countries have greater problems with problematic debts and poor credit profiles. The report finds that the concentration of supervisors around the globe leads to less coordination of activities across the board.

The study also finds that there is a deficiency in the quality of supervision. The lack of supervision leaves gaps in regulation of banks. This allows inefficient supervision and inefficient, supervisory practices. As a result, it leads to incomplete identification of risks, inefficient hedging practices and incomplete resolution of problematic issues.

The UK Bank of England goes further to state that future improvement of the supervisory architecture requires both clarity and consistency. Consistency refers to a set of assumptions about the underlying pricing and risk characteristics of the various credit instruments used in the banking union. Clearness refers to the specification of principles and assumptions. For instance, one might expect a two percent share of total assets to be necessary for effective banking union supervision. More importantly, the provision of a sufficient supervisory framework is critical for the provision of adequate supervisory services. It also enables the provision of real-time risk management services.