Bank Risk Exposure, Bank Failure and Off Balance Sheet Activities: An Empirical Analysis for U.S. Commercial Banks

Abstract

This study investigates the extent to which commercial U.S. banks engage in off balance sheet activities and the possible implication of such engagement on bank risk exposure and bank failure. Given the heterogeneity of banks’ off balance sheet activities, I differentiate credit substitute, derivative and credit derivative contracts and study their alternative role on bank riskiness and bank failure. The preliminary results show that different types of off balance sheet activities impact differently bank risk exposure. While credit substitutes items are associated with better performance, all derivatives contract including those held for non-trading purposes are associated with an increase in risk exposure.e