The Growing Importance Of Bank Supervision In The European Union
This article highlights the implications of firm investment for the value of the firm. Drawing insights from asset theory, the paper explores that financial leveraging is significantly and negatively correlated with firm investment. It is found that the negative impact of leveraging on firm investment is particularly important for high-information asymmetric firms. Specifically, this article highlights the implications of firm-investor inconsistency, high levels of leverage and firm age on firm valuation, investment attractiveness and firm performance. The paper uses firm characteristics, firm-specific inputs, and firm-owner perceptions and beliefs to examine the relationship between these factors and firm valuation.
We analyse the implications of bank supervision, bank policy changes and the introduction of a regulatory body in South Africa. The working paper discusses the effect of bank supervision and the effect that supervisory changes and the introduction of a regulator will have on the South African banks and their ability to serve their domestic customers. It then goes on to explore the potential for South African banks to serve their domestic customers by serving more efficiently, especially when there is a requirement to increase market share or reduce the risk of customer default. Finally it examines the effect of regulatory changes and the potential for increased bank supervision on the firm investment quality.
In South Africa, a few years ago, the finance industry was highly decentralised and the decision making process much more individualised. Supervision and regulation of the banks therefore did not have a direct bearing on firm investment. However, in the last few years and especially in the last two, the government has taken a number of important decisions to centralise the control of the finance system. This includes introducing a supervisory body to the board of directors at banks, a regulator, and introducing a register for investment companies. Although all these decisions are likely to reduce the overall supervision of banks, it is argued that the decentralisation of decision making will still have a significant effect on South African firms.
According to some of the literature on firm investment, the concentration of growth in Europe and the United States in the last decade was accompanied by an expansion of global banking supervision and regulation. The growth in Europe was facilitated by the fact that there was a rise in European financial integration and more cross-border cooperation and supervision. These factors were not as prevalent in the United States, but they did contribute to the rise of Asian financial institutions and firms. In the United States the concentration of growth was facilitated by the fact that there was an increase in domestic supervision and more cooperation across state lines.
However, most of the recent research on the regulation of finance suggests that while the concentration of growth in Europe and the United States were initially driven by state and local supervision policies, these were not necessarily sufficient to promote growth. The increasing inter-regional competition led to a situation where international banks became increasingly unwilling to lend money and many were forced to seek additional sources of capital. Between the early 1990s and the present there has been a marked increase in the number of bank failures, both in the United States and Europe, and this trend is likely to continue. The most common causes of bank failures are the failure of long-term bond and loan portfolios, poor management and oversight, and poor quality credit investments. Many of the European countries have experienced large declines in their banking system over the last few years and some of them have already suffered significant banking crises (for example in Portugal and Ireland). Some of the problems are related to overvaluation of property in these countries and over leverage of assets (by banks) and other issues arising from the activities of their sub-prime lenders.
Given all of these potential causes, it is not surprising that many people argue that the increasing concentration of finance across the European countries in recent years was directly linked to the increased productivity that came from bank supervision. For example, it was found that credit spread between Northern and Southern European countries increased the rate of profit for banks in the North and made the transfer of risks from banks located in Northern Europe to those located in the South easier. This means that although there may be more banking crisis in the coming years, the degree of bank supervision will remain high because it is still necessary to tackle too much too quickly to keep the economy growing. While it is impossible to say exactly how banking supervision will evolve in the future, it is worth remembering that it is likely to become more integrated, and more effective, over time.