Question

Why are off-balance sheet items so important when examining a bank’s financials and assessing risk? If most of these may become medium-risk commercial loans, what do you think regulators could do to encourage banks not to be excessive with these types of loan commitments

Answer 1

Off balance sheet items are all such items which has been entered by banks and they are not representative on the books of accounts of the banks &t will be having risk for the bank as each of the balance sheet items are generating Assets and liabilities for the banks so these off balance sheet items will be including operating leases which will be having impact of the cash flows of the bank but they will not be recorded on the books and hence these off balance sheet items has to be properly analysed in order to establish a relationship with the performance of the bank

these off balance sheet items are generally not displayed on the books of account so investors should be actively trying to judge about the off balance sheet items in order to analyse the financial of the bank and assess the risk.

Regulator's will be encouraging the banks to not engage with off balance sheet items more than the prescribed limit because these off balance sheet items can be disastrous for the bank at the time of the financial downturn because they will not be reflected on the books of the accounts of the bank but they will be affecting the cash flows position of the bank and the profitability of the bank and then there will be an economic downturn or there will be adverse economic situation,the bank will be defaulting on its commitments so the bank should be cutting upon such off balance sheet exposures because they can even cause financial crash like in 2008.