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Supervision of Firm Investments

Financial reports are the core function of finance departments but are ignored by finance officers as well as by shareholders due to lack of firm investment guidance. Drawing lessons from agency studies, this paper uncovers from the past that firm investment refers to financial leveraging and is inherently associated with firm risk. For high information asymmetric companies, it is also seen that the effect of firm investment on firm investment is relatively high. The analysis goes a little beyond that and suggests that there are other important drivers of firm investment that go beyond simply firm assets or operations.

In the UK, Supervisory Risk is an umbrella term for a range of potential risks arising from changes in bank supervision, corporate governance and risk management. In a previous article, I suggested that supervisory risk was too broad a concept to effectively capture all of the potential risks arising from changes in banking supervision. In this Working Paper, I would like to suggest ways in which the current definition of firm investment may be more narrow in its description. To illustrate this point, I will now add bank supervision and corporate governance as additional factors that may increase the scope for firm investment risk.

A centralised regulator is likely to provide a more stable environment for external supervision than local banks. As the UK government has indicated, it is aiming for more community sector involvement and more involvement by the public in the running of local banks. However, it seems that this objective may not be achieved as there are currently very few examples of successful integration of the public into the financial services industry. In addition to this, there is some scepticism about the impact that increased bank supervision will have on investment decisions in the long term.

Substantial differences existed between the United States and the UK in terms of bank supervision and firm investment until the global financial crisis. In the United States, regulators tended to focus on bank activities that were deemed to be consistent with the purpose of their existence (such as maintaining accurate books and providing appropriate customer service). The result was that US banks were effectively neutered when it came to any attempts at taking on the complex tasks of monitoring activities. Regulators also provided relatively little supervisory architecture. There is presently very limited scope for any kind of structural change in the banking sector of the euro area countries, apart from those that might follow the European supervisory architecture recommendation made in 2021.

This supervisory architecture might shift in the future. In my opinion, the only way to create a substantial additional scope for improving bank supervision in the euro area would be to increase the scope of the requirement for company supervision in order to include non-financial companies. Such companies might be subjected to a broader range of bank supervision, including the introduction of a European consolidated framework for bank supervision.

An increased supervisory scope could help complement the efforts of national supervisors to achieve greater efficiency. Ultimately, it might also help to ensure that a better correlation between supervision and investment occurs. Ultimately, I think that there are two main lessons that can be learned from the past few decades of global financial crisis. First, the global economic and banking crisis has highlighted the need for a more systemic approach to supervision across organisations. Second, the increasing emphasis on bank supervision has created space for multiple, fragmented national approaches to supervision.