Off-balance Sheet Transactions Research Articles

Bank liquidity creation, loan concentration and liquidity risk: a comparative analysis of dual banking system

Purpose Keeping in view the robust growth of Islamic banking around the globe, this study aims to comparatively analyze the association between liquidity creation and liquidity risk for Islamic banks (IBANs) and conventional banks (CBANs) in Pakistan and Malaysia over a period of 2004–2021. The moderating role of bank loan concentration on the aforementioned relationship is also studied. Design/methodology/approach Regression estimation methods such as fixed effect, random effect and generalized least square are deployed for obtaining results. Liquidity creation Burger Bouwman measure (cat fat and noncat fat) and Basel-III liquidity risk measure (liquidity coverage ratio) are also used. Findings The results give us insight that liquidity creation is positively and significantly related to liquidity risk in both IBANs and CBANs of Pakistan and Malaysia. This relationship has been moderated negatively (reversed) and significantly by credit concentration showing the importance of risk management and loan portfolio concentration. Practical implications It is analyzed that during the process of liquidity creation, IBANs in Pakistan faced more liquidity risk for both on and off-balance sheet transactions in the presence of moderation of loan concentration than IBANs in Malaysia necessitating strategic policy-making for important aspects of liquidity risk management and loan concentration while creating liquidity. Originality/value Such studies comparing IBANs and CBANs comparison keeping in view liquidity creation, liquidity risk and loan concentration are either limited or nonexistent.

Ways to prevent financial risks of the company and to improve their management

The purpose of the article is to identify ways to prevent financial risk and improve its management in the company. Risk is an objective situation that is reflected in any area of business entities' activities and characterized by presence of an adverse event, in which the company faces economic damage or other losses in the course of risk exposure. Every business activity is associated with risk, and risk management is particularly important for the company. The company operates in various fields for the purpose of generating income. Each of these activities is associated with a certain level of risk. Risks should be regulated and considered within the company's financial capabilities. To achieve these goals, a risk management policy is formed on the part of the company. Under market conditions, risks in the company are at a high level, which requires additional capital for the company. The main objective of the article is to calculate the probability of occurrence of events that negatively affect the income and capital of the company. In other words, the risk is characterized by probability of an adverse event occurrence. These events include: decrease in income, increase in costs due to non-repayment of loans issued on time, decrease in basic resources, non-payment of off-balance sheet transactions, and so on. But the lower the risk level, the lower the probability of obtaining a high income is. Therefore, any company tries to spend its funds on activities with a high level of income and low level of risk. Many general and special methods are used by companies in regard to financial risk management. The most common among them are: diversification, obtaining additional information on results, limiting, insurance, hedging, quality management.

The Influence of Internal Contradictions in the Us Economy on Global Financialization and the Expansion of Fictitious Capital

The financialization genesis of the global economy centered in the United States is on the bifurcation point now— a fictive capital’ expansion is damaging with the social capital regeneration mechanism disaster. The method of identifying and estimating the fictive capital’ extension is absent for now. The fictive capital exists as a metaphor on the science papers but not as an institutional basis of the capital flows directions. The paper aims to update the configuration of the global financial system, its dependence on the performance of US corporations and banks; to identify the sources of vulnerability of world finance and global liquidity from the fictitious capital of American financial markets. The methodology is theoretical pattern’ of financial capital movements and its real statistical market indicators comparison. The empirical base is statistical data about the financial flows and financial results especially about the US as a global financial center. Based on the results the authors have revealed an origin of fictive capital on the US bank sector by the justification for the conclusion of liquidity above the profitable as the purpose of financial operations. This conclusion is confirmed with the scale of off-balance sheet transactions of banks. Besides the regression between the prices of derivative’ basis assets and stock indexes has been shown. Also, the market capitalization of American companies is not sensitive to change in market liquidity indicators. The authors concluded that global financialization is supported by significant internal contradictions in the US economy. The source of contradictions is the financial mechanism for withdrawing liquidity from the sphere of production and circulation into the sphere of financial markets. Capital investment using instruments of the US financial market entails the threat of losing their liquidity. Forecasting the dynamics of the global economy without taking into account the role of fictitious capital, which is emerging in the American financial markets, leads to global vulnerability and may cause the next financial crisis.

BİLANÇO DIŞI İŞLEMLER İLE KARLILIK VE MAKROEKONOMİK DEĞİŞKENLER ARASINDAKİ İLİŞKİNİN MARS METODU İLE BELİRLENMESİ

The aim of this study is to determine the relationship between banking off-balance sheet transactions and macroeconomic variables. For this purpose, off-balance sheet transactions were used as dependent variables in the study, and total assets, equity size and profitability were determined as on-balance sheet independent variables. The non-parametric Multivariate Adaptive Regression Splines (MARS) method, which assumes the functional relationship between dependent and independent variables, was used as the analysis method in the study. As a result of the study, it is seen that all P probability values of the variables are lower than 0.01 and are significant. It is understood that the whole of the model is significant because the F-statistic value is 88.97833 and its significance is 0.0000. R squared is 87%, indicating that the independent variables have high explanatory power for the dependent variable. There are seven basic functions in the model, and it was observed that the size of equity, total assets, profitability, exchange rate and total required reserves have an effect on off-balance sheet transactions. According to the model, it is seen that the active variable affects the off-balance sheet transactions in all values it receives. Again, when the model is examined closely, it is seen that the equity variable is effective in determining the size of off-balance sheet transactions at values greater than 1,378, the exchange rate variable with values greater than 1256.33, and the total reserve requirement variables greater than 4,69932.

Transakcje pozabilansowe w sprawozdaniu finansowym podmiotu gospodarczego

Objective: The article identifies areas of financial statements that are particularly sensitive to the impact of off-balance sheet transactions.Research Design & Methods: An analysis of the subject literature, legal acts and examples of practical identification of the effects of off-balance transactions were applied.Findings: The article looks at the important conditions of the potential control over reporting information, which is not always the result of the balance sheet policy and may be a tool for manipulating an entity’s image in the financial statements.Implications / Recommendations: Economic entities conclude various contracts during their operations. Some may have a particular impact on the entity’s image in the financial statements and the condition of the entity. The effects of such agreements may be short- or long-term.Contribution: The article presents the essence of off-balance transactions and their impact on the entity’s image in the financial statements. Analysis of the subject literature and financial statements prompts the research hypothesis that off-balance sheet transactions can significantly change the entity’s view in the financial statements.

Good Banks, Bad Banks

This paper examines the factors which contribute to banks being perceived as being “good” or “bad” in terms of their impact on the political economy and society as a whole. We first review some of the historical antecedents for public approbation against banks, then consider how changes in ownership affect bank behavior, then examine the financial performance of different sized banks, and then finally discuss the particular examples of off-balance sheet transactions and incomplete sales as indicia of cheating by “bad banks.” We conclude with a discussion of financial conflicts as prohibited by the Volcker Rule and the larger question of corruption and crony capitalism between the largest banks, elected officials and their regulators.

Macroeconomic Variables and Islamic Bank Stock Returns : Panel Data Evidence from GCC Countries

The study provides an empirical evidence of the relationship between macroeconomic variables and bank stock returns in the context of GCC countries using a panel data approach. The data for this study is retrieved from the DataStream World Bank Data archive. The data of 66 banks for the period 2005-2014 was examined using GLS estimation for the analysis. The findings revealed that there is a statistically positive relationship between macroeconomic variables and Islamic bank returns. The positive relationship implies that most banks in the GCC countries engage in numerous off-balance sheet transactions and implement efficient and effective methods of risk management, which reduces their exposure to changes in macroeconomic variables.

Banking Regulation and Determinants of Banks’ Profits: Empirical Evidence from Turkey

The crises that are frequently observed in the banking industries of emerging markets which affect banks’ profits necessitate regulations and supervision of these markets. This paper investigates the determinants of Turkish banks’ profits and the effects of the regulations implemented in this industry on profits. In this research, 468 firm year observations for 36 Turkish banks for the period 1995-2007 were used and analyzed with Prais-Winsten regression method. The empirical findings of the study show positive and statistically significant relations between capital, size, offbalance sheet transactions, liquidity and loans and performance and negative and statistically significant relations between quality of loans, concentration and performance.

How Chinese Banks Reduce Lending While Expanding Credit and the Hidden 2 Trillion RMB in Liquidity: A Case Study on the Bank of Chongqing and Huishang Bank

Chinese banks have sought ways to rapidly expand lending in light of strict regulatory mandates to reduce official lending and maintain high capital adequacy ratios. Through arbitraging capital risk weights, total lending has expanded while capital adequacy ratios have remained unchanged. Off-balance sheet transactions using lower credit quality assets to collateralize repurchases remain a channel for banks to increase their balance sheet and reduce official lending. Many banks even classify repurchase lending underneath the heading of lending to banks. As back door lending funds roll-overs and commodity speculation, banks’ inherent liquidity risk exposure causes investors to significantly underestimate systematic risk. Huishang Bank’s expansion of arbitraged credit lines into high risk areas has forced the bank to increase Treasury assets 100 billion rmb in 18 months for a net profit increase of 16 million rmb or a marginal return on net assets of 0.015% — in essence — zero.

Cross-selling, switching costs and imperfect competition in British banks

This paper attempts to evaluate the competitiveness of British banking in the presence of cross-selling and switching costs during 1993–2008. It presents estimates of a model of banking behaviour that encompasses switching costs as well as cross-selling of loans and off-balance sheet transactions. The evidence from panel estimation of the model indicates that the consumer faced high switching costs in the loan market in the latter part of the sample period, as a result of weaker competitiveness in the loan market. Additionally, the weaker competitiveness in the loan market appears to facilitate the cross-selling behaviour of British banks, which helps explain the rapid growth of non-interest income during the last two decades.

Off-Balance Sheet Activities Impact on Commercial Banks Performance: An Emerging Market Perspective

This paper examines the effect of off-balance sheet (OBS) activities on performance of the banks listed on Istanbul Stock Exchange (ISE). We use four measures of performance including bank’s risk exposures, profitability, leverage, and liquidity position. We find that both bank-specific risk and foreign exchange rate risk are positively related with OBS activities. This indicates that OBS activities increase bank-specific and foreign exchange risk exposures of the banks in Turkey. The positive relationship might serve as a warning to bank’s speculative action using OBS transactions in the market. The results also indicate that OBS activities, due to its hedging perception, improve bank’s stock returns but have a negative impact on return on equity. In addition, OBS activities do not have a statistically significant impact on leverage or liquidity.

Cross-Selling, Switching Costs and Imperfect Competition in British Banks

We seek to evaluate the competitiveness of British banking in the presence of cross-selling and switching costs during 1993-2008. We estimate a model of banking behaviour that encompasses switching costs as well as cross-selling of loans and off-balance sheet transactions. The evidence from panel estimation of the model lends support to our theoretical priors on the cross-selling behaviour of British banks, which helps explain the rapid growth of non-interest income during this period. Also, it is found that the banking consumer faced high switching costs in the loan market in the latter part of the sample period, which indicates a worsening of competitiveness.

The Impact of Operating Leases on Firm Financial and Operating Risk

This study uses ex ante cost-of-equity capital measures based on accounting valuation models to assess the risk relevance of off-balance sheet operating leases. We investigate whether off-balance sheet operating leases have the same risk-relevance for explaining ex ante measures of risk as a firm’s on-balance sheet capital leases. We also investigate how investors’ risk perception of operating leases has changed in recent years when off-balance sheet transactions in general and operating leases in particular have been facing increased regulatory and investor scrutiny. This study finds that a firm’s ex ante cost-of-equity capital is positively associated with adjustments in its financial leverage (financial risk) and operating leverage (operating risk) resulting from capitalized off-balance sheet operating leases and that the positive association between the ex ante cost of capital and the impact of operating leases on a firm’s financial leverage is weaker for the operating leases compared with the capital leases. This study also finds that the positive association between the ex ante cost of capital and the impact of operating leases on a firm’s financial leverage has decreased considerably in recent years, since regulators issued interpretation letters clarifying controversial lease accounting issues.

The Economic Impact of the Lack of Transparency in Financial Reporting

Off-balance-sheet amounts are in the trillions of dollars, not including all transactions with off-balance-sheet implications. Financial managers and consultants intentionally structure transactions that are abusive of off-balance sheet accounting rules, which leads to a lack of transparency in financial reporting. This paper explores several ways in which companies manipulate off-balance sheet transactions to satisfy personal and business objectives as well as the impact of such manipulations. It is time for regulatory bodies to close the loopholes, eliminate overly rules-based standards, clearly state the economic objective of each standard, and require firms to disclose the economic motivations for the accounting practices they adopt.

Efficiency Effect of Off-Balance Sheet Transactions: The Case of the Commercial Banking Industry in the State of Kuwait

Efficiency Effect of Off-Balance Sheet Transactions: The Case of the Commercial Banking Industry in the State of Kuwait

Central Bank Use of Derivatives and Other Contingent Liabilities

While central banks have frequently undertaken contingent commitments as part of thier regula operation in the economy, it is only recently, through central bank involvement in the derivative markets, that these transactions have drawn the attention of policy makers, market participants, and international agencies. This renewed interest and the fact that these contingent operations came to light in the aftermath of the Asian financial crisis, increased the interest in the analytics and the measurement of these commitments. The goal of this paper is to explore the rationale for cental banks to undertake these types of commitments -- in particular to intervene in derivative markets -- and to assess the arguments that are commonly made in favor of and against this sort of involvement. In addition, the paper suggest a methodology to analyze the whole spectrum of central bank contingent liabilities. Specifically we aggregate all on and off-balance sheet transactions in a single framework so as to be able to draw meaningful conclusion on the consequences of these central bank operations on a number of important policy issues such as the volume of central banks' available reserves, the potential burden arising from instability in the banking sector and the overall solvency of the central bank.

A Revisionist View of Enron and the Sudden Death of 'May'

This article makes two points about the academic and regulatory reaction to Enron's collapse. First, it argues that what seems to be emerging as the conventional story of Enron, involving alleged fraud related to Special Purpose Entities, is incorrect. Instead, this article claims that Enron is largely a story about derivatives - financial instruments such as options, futures, and other contracts whose value is linked to some underlying financial instrument or index. A close analysis of the facts shows that the most prominent SPE transactions were largely irrelevant to Enron's collapse, and that most of Enron's deals with SPEs were arguably legal, even though disclosure of those deals did not comport with economic reality. This first point about derivatives is important to the literature studying the relationship between finance and law: legal rules create incentives for parties to engage in economically equivalent unregulated transactions and financial innovation creates incentives for parties to increase risks (to increase expected return) outside the scope of legal rules requiring disclosure. Second, this article argues that the regulatory response to Enron was misguided, in part because it focused too much on the conventional story. Congress - in a little noticed provision of the Sarbanes-Oxley Act of 2002, Section 401(a) - directed the Securities and Exchange Commission to adopt new regulations requiring that periodic filings disclose off-balance sheet transactions that may have a material effect on a company's financial condition. The SEC originally proposed disclosure regulations based on this heightened may standard, but in its final release reverted to a lower reasonably likely standard. Surprisingly, the SEC promulgated these reasonably likely regulations even though Congress, in debating Sarbanes-Oxley, already had considered - and rejected - this approach. This second point about regulatory response is important to the literatures studying both mandatory disclosure and the relationship between Congress and administrative agencies: not only did interested private actors quickly capture the agency rule-making process, but they were able to persuade the agency to revive an interpretation the legislature already had considered and rejected.

Instructional Case: Worldwide Shipping Corporation Ltd: Early or Late Adoption of a New International Accounting Standard?

The management of Worldwide Shipping Corporation Ltd (hereafter “Worldwide Shipping”) is confronted with a dilemma when a new international accounting standard on leases is introduced which contains a transitional provision allowing firms to defer implementation for a period of four years. Students are required to put themselves in the position of managers who have to weigh the adverse impact of early adoption of the new accounting standard against a responsibility for fair financial reporting. Worldwide Shipping is a multifaceted case that can be used as an accounting case study or a financial analysis study. The objectives of the case are threefold. First, it aims to provide students with a better understanding of the impact of off-balance sheet transactions (in this case, sale-leaseback contracts) on a firm's financial statements. Second, it requires students to examine implications of accounting choice on management compensation and debt-contracting costs, as well as the perplexing problem of recognition in financial statements vs. footnote disclosures. By putting students in the position of managers, the case increases students' awareness of the possible economic consequences arising from accounting choice. Third, it provides students with a useful exercise in the mechanics of effecting a change in accounting method using the retroactive method.