Cool Off Balance Sheet Banking
Basel 2 focuses on expected usage and EAD.
Off balance sheet banking. For committed lines of credit it makes sense to set the exposure at 100 of the commitment since the bank. Although not recorded on the balance sheet they. Off balance sheet refers to those assets and liabilities not appearing on an entitys balance sheet but which nonetheless effectively belong to the enterprise.
It therefore suggests that off-balance-sheet risks cannot and should not be analysed separately from the risks arising from on-balance-sheet business but should be regarded as an integral part of banks overall risk profiles. Off-balance sheet activities include items such as loan commitments letters of credit and revolving underwriting facilities. Based on a panel data set for 114 South Asian commercial banks we find that off-balance sheet banking reduces the effectiveness of the bank lending channel of monetary transmission.
Investments of clients held by an investment company etc. The off-balance sheet exposures in banking activities refers to activities that do not involve loans and deposits but generate fee income to the banks. Institutionsare required to report off-balance sheet items in conformance with Call Report Instructions.
Off-Balance Sheet Exposures Since the 1980s off-balance sheet commitments have grown rapidly in major banks among which there are swaps forward rate agreements bankers acceptances revolving underwriting facilities etc. They are either a liability or an asset which are not shown on a companys balance sheet as the business is not a legal owner of the respective item. Now off-balance sheet activities can affect the future shape of the financial institutions balance sheet thus can be a significant source of risk exposure.
An off-balance sheet activity does not appear on the financial intuitions balance sheet rather it is shown as a note bellow the balance sheet. Which are contingent in nature are some of the examples off -balance sheet exposures of the banks. The non-fund based facilities like Issuance of letter of guarantee letter of credit deferred payment guarantee letter of comfort.
The use of off-balance sheet may improve activities earnings ratios because earnings generated from the. Off Balance Sheet Commitments. Examples of such items include operating lease sale of receivables under specific conditions guarantees for letters of credit etc.