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Ebook Financial institutions management (6th edition): Part 2

(BQ) Part 2 book "Financial institutions management" has contents: Off-Balance-sheet risk, foreign exchange risk, sovereign risk, technology and other operational risks, liquidity risk, capital adequacy, product diversification, geographic expansion, liability and liquidity management,.and other contents. | Find more at http://www.downloadslide.com Chapter Thirteen Off-Balance-Sheet Risk INTRODUCTION contingent assets and liabilities Assets and liabilities off the balance sheet that potentially can produce positive or negative future cash flows for an FI. One of the most important choices facing an FI manager is the relative scale of an FI’s on- and off-balance-sheet (OBS) activities. Most of us are aware of on-balancesheet activities because they appear on an FI’s published asset and liability balance sheets. For example, an FI’s deposits and holdings of bonds and loans are on-balance-sheet activities. By comparison, off-balance-sheet activities are less obvious and often are invisible to all but the best-informed investor or regulator. In accounting terms, off-balance-sheet items usually appear “below the bottom line,” frequently just as footnotes to financial statements. In economic terms, however, off-balance-sheet items are contingent assets and liabilities that affect the future, rather than the current, shape of an FI’s balance sheet. As such, they have a direct impact on the FI’s future profitability and performance. Consequently, efficient management of these OBS items is central to controlling overall risk exposure in a modern FI. From a valuation perspective, OBS assets and liabilities have the potential to produce positive or negative future cash flows. Fees from OBS activities provide a key source of noninterest income for many FIs, especially the largest and most creditworthy ones.1 For example, in just the first half of 2006, derivative securities trading revenues earned by commercial banks topped $10.9 billion, up 1,795 percent from $3.9 billion in the first six months of 1996. Further, FIs use some OBS activities (especially forwards, futures, options, and swaps) to reduce or manage their interest rate risk (see Chapters 8 and 9), foreign exchange risk (see Chapter 14), and credit risk (see Chapters 11 and 12) exposures in a manner superior to what