Question

Discuss how an OBS activity moves onto the balance sheet as an asset or liability and discuss the risks and benefits of OBS activities to a bank.

Answer 1

Off Balance Sheet (OBS) items are those assets and liabilities which are not appear in the balance sheet of the company but reported on the notes to accounts. These items are indirectly affected the financial position of the company.

Example of (OBS) Assets and Liabilities are:-

Off Balance Sheet Assets: Operating lease is one of the leasing method in which lessor retain the assets on its balance sheet.

Off Balance Sheet Liabilities: These includes guarantees and lawful suits not yet been settled.

An item or activity is an off balance sheet assets or liability when contingent event occurs & move of the assets and liabilities side.

Banks are financial institutions; its main source of income is Bank charges and Bank Interest which they charge from customers. Financing are also two types on –balance- sheet financing and off- balance- sheet financing

Benefit to Bank for OBS

1. Off Balance sheet activates involves contingent commitment or contracts which generate income to a banks.
2. Bank fee which bank charge when making commitment.

Risk to Bank for OBS:-

1. Loan commitment and interest rate risk: If the fixed rate commitment he bank may exposed to interest rate risk and in case of floating rate commitment, there is still exposure to basis risk.
2. Credit risk arises to bank because credit rating of the borrower may deteriorate over the life of the commitment.