Supervisory Architecture for Firm Investment Strategies
Financial Theory and Business Case Study in International Financial Markets is written by Subir Bhasat. This book mainly discusses financial concepts, current theory, economic structure and banking systems and their impacts on the financing of international businesses. Subir Bhasat has done a lot of theoretical work on international finance and he bases most of his work on that. His main thesis is that financial intermediaries do not provide any direct support to international business, as they are mostly facilitators rather than directly supportive source of finance.
The paper explores the implications of bank supervision on firm investment through a detailed analysis of the effects of bank supervision on investment decisions. It is seen that the effect of bank supervision on firm investment is especially significant for high-information asymmetric enterprises. The paper goes on to state that although there are some arguments in favor of increasing bank supervision for asymmetric enterprises, it should be noted that such changes will only have a limited effect on firm investment as the level of supervision will need to be substantially increased in order to effect a meaningful change in investment decisions. These conclusions are drawn based on the assumption that if investment decisions are made on the basis of bank supervision, then any additional costs will be passed on to the end user. If this assumption is wrong then firms can actually increase investment if they choose to do so.
One of the main reasons why firm investment can be affected by changes in bank supervision is that banks are less confident about their ability to protect the money supply. An increase in bank supervision will reduce the confidence of banks in their ability to protect the money supply meaning that firms will be less likely to deposit surplus cash in the bank and banks will be less likely to borrow from them. Such a reduction in centralised bank supervision would decrease aggregate demand. If the supply of money is controlled through centralised banks then the economy can experience a deficient growth in output and employment because money will not be available to purchase goods and services.
Changes to bank policy can affect firm investment decisions because decisions are based on the expected direction of the economy. If the economy turns downward and unemployment increases then firms will not want to put cash reserves into assets that are risky because they may not earn the return on their invested money. If the economy turns upward then firms will not want to decrease cash holdings because it is possible that these investments will not earn them anything and employment will decline because the number of employed people declines because firms will use up their cash reserves reducing employment.
Some of the proposed supervisory architecture proposals from the European Commission refer to a future module which will enable firms to trade with one another via an online clearing centre. This would represent a major step forward in terms of increasing competitiveness and reducing barriers between the various European Union (EU) countries. It also represents a significant increase in regulation and supervision of the financial markets. The proposal however is currently only a proposal and has no current implementation date.
Supervision of banking remains an important aspect of overall competitiveness in the euro area. In order to facilitate economic activity, there will be a need for a Single Supervisory Mechanism across the EU. Such a system needs to have clear objectives that are determined by the EU governments. Ultimately, such a system needs to be compatible with the overall regulatory framework of the EU countries including the provision of sufficient supervisory authority, consistency of supervisory mechanisms and adequate quality of information and complaints handling procedures, competitive balance, and adequate and effective supervisory capacity.