The Role of Supervisory Architecture in Sectoral Banking Regimes
Finance theory is a branch of business theory which looks into the problem of firm investment and its relationship to the economy. The paper by Das and Kumar (eds) addresses a broad range of issues in this context and goes a long way in illuminating the theoretical foundations of investment theory. Drawing insights from international monetary theory, the article uncovers that financial Leverage is significantly and negatively correlated with firm investment. Moreover, it is found that the negative impact of leveraged investments on firm investment across different countries is particularly high for high information asymmetric businesses.
The authors conclude that the results obtained by their research are consistent with the view that firms do not increase their working capital when they make profits but decrease it when they are in distress. They argue that this can be attributed to differences in financial supervision and the ability of banks to ensure bank supervision. Finally, they argue that differences in bank supervision can lead to differences in firm investment decisions. They go on to argue that changes in bank regulation can lead to increased or decreased output depending upon the nature of the reforms made. The paper thus concludes by comparing the theoretical framework of theory with various empirical studies on savings behavior, firm investment and bank supervision and concludes that a combination of both positive and negative externalities lead to distorted savings expectations.
The authors utilise two different models to address the relationships between firm investment and bank supervision. First, they examine direct effects of bank supervision on firms and find no evidence that bank supervision leads to higher savings rates. Second, they examine indirect effects of bank supervision on firms and find that it leads to lower investment and hence lower savings rates. The paper therefore concludes by comparing the results obtained by using both aggregate and firm-specific models and concludes that the results support the view that there are substantial welfare losses associated with increased bank regulation.
The present paper examines the relationship between financial crises and firm investments. Using a panel of random samples, we find that the level of government intervention during a crisis period does not significantly affect firm investment across the four treatments. There is, however, a large spillover effect from increased government intervention into other aspects of economic activity. This suggests that, apart from the short-run impact on savings rates, long-run effects may be negative. The authors conclude that future research should be directed towards testing the hypotheses of the present study and not just looking at the direct effects of government interventions.
Our main focus in this paper is the United Kingdom and the United States. We use a modified correlated time-series approach to analyze the role of supervisory architecture in relation to firm investment decisions. Specifically, we use three important papers by Orbis, Rogoff and van der Leide (eds), which are essentially standard open-economy models.
In essence, our main result is that there is little relationship between firm investment decisions and bank policy changes. In the United States and the United Kingdom, there was a large rise in bank regulation after the passage of the FSA (Financial Services Authority) Act in 2021. However, changes in bank regulation did not lead to increased bank supervision or supervisory architecture in either country.