Question

Why have banks substantially increased off-balance sheet activities over the past two decades? please explain. thank you

Answer 1

The definition of the 'off-balance sheet' (hereafter OBS) denotes that the operations include contingent obligations or contracts that produce a bank 's profits, which are not usually recorded as assets or liabilities under traditional accounting. Within a bank's accounts, contingent products may be reported as 'balance sheet statements,' 'contingent commitment banking,' 'assetless banking,' or even 'invisible banking.'

The competitive advantage of the bank in terms of originating and servicing loans had a greater effect on the bank's probability of selling loans than was the case with regulation, which had the greatest impact in deciding the amount of loans a bank could offer. banks are more likely to participate in standby letters of credit agreements that are usually safer for banks and securitised loans than loans in the asset portfolio of the same bank;

Automated clearing houses set-up for inter-bank settlement can be opened up to others allowing corporate clients to have guidance on magnetic tape for direct payment crediting. Computing facilities can be used to set up consumer cash management systems. Banks build portfolio management skills which can be used in customer advice and investment selection

Off-balance sheet operations are also mechanisms for information management and risk-sharing. We aim to unbundle the risks inherent in the underlying properties, and allow these decomposed risks to be repackaged into synthetic products and treated separately. Establishing a credit line earns a commitment fee for a bank, offers protection against liquidity needs for the consumer, which allows the bank to mitigate the liquidity risk it is best able to bear. Banks also protect customers from and themselves from asset risk through activities such as bill acceptances and standby letters of credit