The relationship between firm assets, firm financial flexibility, and firm financial performance has long been studied by many financial analysts and researchers. In essence, the research finds that firm financial flexibility acts as a feedback mechanism for firm asset allocation and firm valuation. The research suggests that firms enjoy greater firm returns when they make use of asset-based instruments such as fixed earnings bonds to boost firm balance sheets. However, this relationship does not hold true across all types of assets and only holds positive value in the long run.
Asset allocation is not the only factor that influences firm investment strategies; the current state of banking supervision also plays a role. According to experts in banking, credit quality and bank supervision are major factors affecting banks decision making. Credit quality refers to the condition of credit offered by a lender to a borrower. On the one hand, a bank can give a loan to a person based on his or her credit status; however, a bank will refuse to give a loan to a person based on poor credit history. If a bank follows standard loan criteria, then a loan to a person with poor credit history would not be approved. On the other hand, if a bank follows very strict criteria for approving loans, then it could deny a loan application based on its poor credit history.
The other factor that determines firm investment strategies is the presence or absence of centralised bank supervision. Centralised banks are designed to perform the function of public banks, but their existence is not necessary for economic activity. The government controls the main distribution channels and decides the set composition of the national banking system. The presence of a centralised bank supervision in the economy does not significantly affect the functioning of banks; however, there are mixed feelings on the part of depositors, brokers, managers, employees, stockholders, etc.
Most European banks that have branches in the United Kingdom have established a number of supervisory structures to ensure the identification and recording of risks. Supervisory architecture refers to the set of general principles and guidelines defining how firms can apply for licenses and undertake certain activities. Supervisory architecture is designed to allow companies to identify risks and to establish procedures for addressing those risks. This architecture also enables supervisors to take action in case a firm has breach of regulations or activities that exceed the allowed limits.
Supervision in the United Kingdom occurs at the local level. Supervisors usually report directly to the bank manager, who decides the most appropriate supervisory personnel based on their experience and suitability for the tasks. Supervisors may be appointed from the banks senior management, or from independent professional bodies such as the Institute of Chartered Surveyors. Independent professional bodies may also be responsible for collecting and analysing supervisory complaints.
Supervisory changes are implemented on a case-by-case basis, depending on various criteria. A new supervisory approach might be required if a bank observes significant deterioration in its quality of business, or if it fails to comply with regulatory requirements. A more radical step would be the replacement of current supervisors with more qualified supervisors who are more suitable for the job. The cost of implementing a more radical supervisor system might increase bank supervision costs.