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Chapter 13 Off-Balance-Sheet Risk.docx
Chapter 13 Off-Balance-Sheet Risk.docx

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Ryerson University
FIN 701
Patricia Mc Graw

FIN701 Financial Institutions Management CHAPTER 13 Off-Balance-Sheet Risk INTRODUCTION  Off-balance-sheet items usually appear “below the bottom line,” frequently as footnotes on financial statement  Contingent assets and liabilities – assets and liabilities off the balance sheet that potentially can produce positive or negative future cash flows for an FI o Fees from OBS activities provide key source of non-interest income for many FIs  Use OBS activities to reduce or manage interest rate risk, foreign exchange risk, and credit risk exposures  Major types of off-balance-sheet activities o Loan commitment – contractual commitment to make a loan up to a stated amount at a given interest rate in the future o Letters of credit – contingent guarantees sold by FI to underwrite performance of buyer of the guaranty o Derivative contract – agreement between two parties to exchange standard quantity of an asset at predetermined price at specified date in the future o When-issued trading – trading in securities prior to their actual issues o Loans sold – loans originated by FI and then sold to other investors that (in some cases) can be returned to the originating institution in the future if the credit quality of the loans deteriorates OFF-BALANCE-SHEET ACTIVITIES AND FI SOLVENCY  Off-balance-sheet (OBS) asset – an item or activity that, when a contingent even occurs, moves onto asset side of the balance sheet  Off-balance-sheet (OBS) liability – and item or activity that, when a contingent even occurs, moves onto liability side of the balance sheet  Delta of an option – sensitivity of an option’s value to a unit change in the price of the underlying security o Delta of the option varies with level of price of underlying security as it moves in and out of money, that is, 0
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