Off-balance Sheet Research Articles

FX swaps and forwards in global dollar debt: “Known knowns” and “known unknowns”

Several types of FX derivatives involve the exchange of principal, making them a form of collateralised loan. But unlike other forms of collateralised borrowing, the payment obligations associated with such derivatives are not reported on the balance sheet: they are in a very real sense “missing debt”. This introduces gaps in the compilation of countries’ and sectors’ foreign currency positions, in particular their short-term US dollar obligations and receipts. When economic shocks occur, policies designed to restore the flow of dollar liquidity outside the United States (eg central bank swap lines) are blind to the scale of dollar liquidity needs in particular locations. This paper presents evidence that the missing dollar debt of banks and non-banks outside the United States is large, roughly double the dollar debt recorded on their balance sheets. It then reviews how well benchmark statistical collections – BIS international banking statistics (IBS), BIS OTC Derivatives (OTCD) statistics, International Investment Position (IIP) statistics, and the Coordinated Portfolio Investment Survey (CPIS)) – capture foreign currency positions, both on- and off-balance sheet, and where modifications to these statistics could help to close data gaps.

Measuring the Determining Factors of Financial Development of Commercial Banks in Selected SAARC Countries

Traditional banks face the issue of risk diversification, and it is dealt with when they evolve into financial institutions. So, the present study aims to investigate banking and off-balance sheet (OBS)-based risks and regulatory changes in certain age-old South Asian (SA) banks and finds the tenacity of the OBS in the long run. For these research goals, two estimates are applied: fixed effects (FE) and generalized method of moments (GMM). Using FE, the researchers estimate the realm and time for finding financial shocks and other time-related factors affecting the SA countries. The majority of findings reveal a constant market theory stating the performance of SA in assessing OBS-related risks. Banks in SA also seem to follow the market regulatory and TT in capital needs that will incentivize banks to take too much risk in off-balance sheet activities (OBSA). The research findings are practically applied to bank-related risks, pressure from regulatory restructuring, and dangers from the systematic factors beneficial to policymakers and practitioners.

Effects of financial statement and macroeconomic factors on risk measures of banks in India

This paper aims to analyse the effects of financial statement indicators and off-balance sheet items affecting risk measures among Indian banks employing both panel data regression and a non-parametric decision tree approach. We explore the effects of bank size, leverage, exposure to contingent liabilities including off-balance sheet derivatives usage and macroeconomic factors on risk measures for banks. In this paper, it is also aimed to examine the effects of the major financial liberalization policy period in the domestic market in India that started in the mid-1990s and ended around 2004 as well as impacts of the 2008 global financial crisis on the risk measures of banks operating in India. As risk measures, we present a comparative analysis of liquidity, solvency, and interest rate risk measures of Indian banks across public (government) and private ownership categories. Main findings from our study demonstrate (i) significant impact of capital adequacy and the bank size on all the risk measures, (ii) contingent liabilities (including derivatives usage) at banks is observed to significantly impact the asset management measure of liquidity risk and the solvency risk of banks, (iii) GDP growth is observed to impact the asset management and liability management measure of liquidity risk, (iv) the global financial crisis is found to have a significant impact on the liquidity risk measures and interest rate risk, but a weak effect on solvency risk of Indian banks, (v) bank ownership category (government owned versus private sector banks) is observed to have a significant impact on all the risk measures, and finally (vi) financial liberalization reforms had a highly significant effect on the liquidity risk at banks.

Off-balance sheet disclosure and leverage adjustment speed

This paper studies how accounting treatment of off-balance sheet financing affects the speed of capital structure adjustment. Utilizing a quasi-natural experiment created by Accounting Standards Update (ASU) No. 2016-02 which requires operating lease to be capitalized on the balance sheet, we find that firms adjust to target leverage faster after the announcement of the new standard. We also find that under-levered firms increase the speed of adjustment immediately after the announcement, whereas over-levered firms increase the speed of adjustment after the adoption of the new standard. Overall, our findings shed light on the impact of accounting disclosure on financial policy.

Option-based intermediary leverage

We introduce a new proxy for the health of financial intermediaries-the Leverage Bearing Capacity (LBC). LBC is the leverage of a fictitious intermediary that targets a fixed level of risk and rebalances its capital structure on an ongoing basis. Our measure is based on market values, incorporates off-balance sheet activities, is available at any frequency, and inherently captures higher-order risks. We analyze the dynamics of LBC in event studies and demonstrate that it is closely linked to financial sector uncertainty. Building on an intermediary asset pricing model, we validate that LBC proxies the marginal wealth of intermediaries. Empirically, it explains the expected returns across several asset classes and subsumes the explanatory power of existing measures of intermediaries’ health, financial uncertainty, higher-order risks, and common risk factors.

Bank herding and systemic risk

• We study banks' herding in portfolios and their systemic risk contributions. • Pose and test alternative hypotheses using novel measures of herding. • Nuanced empirical results differ by portfolio, bank size, and periods. • Evidence of "too-many-to-fail" effects on perceptions of herding and systemic risk. Bank herding behavior is often hypothesized to increase systemic risk, but the actual effect is unclear ex-ante from the theory and unknown ex-post from the data. We expand the literature on this topic in several dimensions – posing alternative hypotheses regarding the effects of herding in asset, liability, and off-balance sheet portfolios; developing a novel set of bank-specific, time-varying measures of herding in these portfolios; and empirically testing the relations between bank herding for all three portfolios and bank systemic risk contributions. We find nuanced empirical results that differ by portfolio, bank size class, and periods before versus after TARP.

Banks' off-balance sheet manipulations

In this study, we deploy various methods for analyses of digits and provide rigorous empirical evidence that most banks’ off-balance sheet items have partial conformity to Benford’s law in their first leading (significant) digits. The accounting records also show scarce compliance with Benford’s law in their second leading digits. Most of these banking activities emerge with values that are downward manipulated at several percentages and excessive rounding, with disproportionate usage of 0 and 5 in their last three digits, regardless of whether the items are traded on designated exchanges, handled only Over-the-Counter, or represent business relationships between commercial banks and customers. Overall, we expose here widespread though modest artificial deflation in the recorded values of banks’ OBS items and a unique phenomenon of significant overuse of the numbers 0 and 5 in different digits, with strong violations of Benford’s law. We further notice that, for the majority of banks’ off-balance sheet items, key regulatory developments, such as the three Basel Accords, present meaningful and continuous impact on the overall reduction in the anomalous appearances of the numbers 5 in the first and 0 and 5 in the second leading digits. At present, however, we still observe irregular spreads (well above the norm) of the numbers 0 and 5 in the second leading digits.

Do traditional off-balance sheet exposures increase bank risk?

Banks’ off-balance sheet activities are among the many factors blamed for the risk-taking that led to the 2007–2008 financial crisis. We test whether and how off-balance sheet exposures influenced risk-taking at publicly traded commercial banks in the G-7 countries between 1998 and 2018. Contrary to expectations, we find strong evidence that larger off-balance sheet exposures are associated with lower aggregate and idiosyncratic risk but higher tail risk. Further, we observe a non-linear relationship between off-balance sheet activities and risk. Our results suggest that placing absolute limits on OBS activities might increase bank risk-taking.

Monetary stimulus and bank liquidity hoarding in an emerging market

The paper examines the impact of monetary policy on bank liquidity hoarding. Using novel measures to capture bank liquidity hoarding in Vietnam during 2007–2019, we find that banks decrease total liquidity hoarding and all three liquidity hoarding components (asset-, liability-, and off-balance sheet items) when the central bank injects more money into the economy. An interesting result appears when we document that banks hoard more liquidity in the event of lowered interest rates. Our additional analysis indicates that the extent to which bank liquidity hoarding responds to monetary policy changes is clearer in lower-risk banks.

Shadow banking and the bank lending channel of monetary policy in China

We study how shadow banking affects the effectiveness of monetary policy in China. Using novel data on bank-issued off-balance sheet wealth management products (WMPs), we show that banks improve their on-balance sheet risk profile by issuing WMPs. This in turn lowers the sensitivity of banks’ wholesale funding cost to monetary policy and reduces the effectiveness of the bank lending channel. The effect of our mechanism on total credit is quantitatively similar to the effect arising from the substitution between traditional loans and shadow banking loans previously analyzed in the literature. The channel documented in this paper has novel implications for the regulation of banks’ off-balance sheet activities and market-based funding.

Leaving the darkness: The emergence of shadow banks

This paper studies the interaction between bank capital regulation, moral hazard and co-existence of traditional and shadow banks. Bank managers can choose between traditional banking and off-balance sheet special purpose vehicles (SPV), in a setup with deposit insurance and moral hazard. We first show that in the absence of SPV intermediation, capital requirements are ineffective at preventing the moral hazard problem originated by deposit insurance. We find that shadow banks can improve financial stability, when there is full information sharing. Finally, we analyze the case of neglected tail risk. We find that under such circumstances, the SPV will increase financial risk by exposing the system to extreme events.

Комплексный подход к освоению сырьевой базы горнодобывающего региона с применением ресурсовоспроизводящих технологий

Introduction. The constant increase in the consumption of mineral resources leads to the depletion of available reserves and a sharp increase in the depth of field development. In addition, reserves that were previously classified as off-balance sheet and the development of which is economically inefficient at the time of the assessment of technical and economic calculations are involved in the development of minerals: low metal content; location within water protection zones, settlements, structures, agricultural facilities, nature reserves, monuments of nature, history and culture. Involvement in the development of areas of deposits with a low content of a useful component in ore increases the costs of extraction, transportation and processing, as well as the formation of more man-made waste. The main way to ensure the sustainable development of the mining region is the use of mineral deposit development systems with a hardening bookmark and the involvement of man-made waste in a closed production cycle. The use of geotechnology with a bookmark helps to increase the completeness and quality of the extraction of reserves of the deposit, protects the hydrogeological regime and reduces the degree of crack development in the underworked array, which leads to the preservation of the water-proof thickness and protects the daytime surface from collapse. Geotechnology with a bookmark allows you to work out previously abandoned targets, which increases the mineral resource base of the mining enterprise and increases the life of the mine and allows you to solve the social issue of the region where the mining enterprise is the city-forming. The use of man-made waste from mining and processing and metallurgical enterprises in the preparation of the laying composite leads to their disposal. Utilization of man-made waste with geotechnology with a bookmark leads to a decrease in the volume of man-made storage facilities, which reduces the cost of their creation and maintenance. All this contributes to the implementation of the concept of waste-free production, the integrated development of natural and man-made resources, the sustainable development of the mining region and the reduction of the impact of mining and metallurgical industries on the environment. Purpose of research. Introduction of technologies that ensure the completeness of mineral extraction and safe mining operations with minimal environmental impact. Research methods. G eneralization of theoretical and experimental studies carried out by scientists in this field, synthesis of literary and patent data, analysis and summary of previously performed own research, comparison of theoretical calculation data on mathematical models with the experimental results obtained, application of current state standards, approved research methodology, use of calibrated and serviceable equipment. Materials were activated in a DESI-11 laboratory disintegrator, compression samples were tested on a PI-2000-A test press, and the reliability was confirmed by the repeatability of the results with a sufficient number of experiments. Research results. The possibility of replacing the traditional components of the laying composite with man-made waste without loss of regulatory characteristics and improvement of its rheological properties is substantiated. The necessity of applying mechanical activation treatment of the components of the laying composite in order to improve its rheological characteristics and the strength of the array after solidification is proved. The demand for resource-reproducing technologies that allow the most complete use of the technogenic mineral resource potential of the mining and processing enterprise, which will lead to a multiplicative ecological and economic effect, has been confirmed. It is established that the sustainable development of the mining and processing region is impossible without highly efficient exploitation of natural deposits and man-made geo-resources in combination with an integrated approach to the development of the subsoil. Conclusions. The level of impact of the mining and processing enterprise on the ecological situation of the region is reduced by involving man-made waste in a closed production cycle. Increasing the efficiency of the enterprise is achieved through the introduction of resource-reproducing technologies. The sustainable development of the mining region is ensured by switching to the innovative principle of production organization, which excludes the formation of waste and predetermines the use of intermediate products (man-made waste) in cyclic production.

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.

Off - balance - sheet Information Disclosure of Listed Bank Derivative Financial Instruments

With China’s progressive multi-level capital market strategic direction, as well as the gradual implementation of the mixed operation of commercial banks. Derivative financial instruments will be further developed in commercial banks. This paper focuses on the information disclosure of derivative financial instruments by commercial banks, combined with the standard of disclosure of off-balance-sheet information of international derivative financial instruments, using the disclosure index and project disclosure ratio to analyze the disclosure of derivative financial instruments of listed banks in our country, Off-balance sheet information disclosure, and puts forward suggestions on how to further improve the quality of off-balance-sheet information disclosure of derivative financial instruments in China.

Efficiency and Book-to-Market Ratios of U.S. Pharmaceutical Firms

Using data envelopment analysis (DEA), we calculate sales efficiency for U.S. pharmaceutical firms and find it to be positively associated with those firms’ book-to-market ratios (a measure widely used in the finance literature to estimate the risk and growth potential of firms’ common stock). Thus, we conclude that sales-efficient firms in this industry are, on average, undervalued and suggest that the U.S. pharmaceutical industry is characterized by firms making off-balance sheet investments, which we argue leads to efficiency during our sample years (2009-2015). We also conduct longitudinal analyses and conclude that firms in our sample with smaller asset levels are more efficient. Finally, we conduct a slack analysis, which concludes that most of the overvalued companies exhibit inefficiencies in their utilization of research and development costs and selling, general, and administrative costs. Fewer of those firms exhibit inefficient utilization of their costs of goods sold.

Infrastructure development: reflections on Sierra Leone infrastructure scheme and the Lungi Bridge project

PurposeThe Government of Sierra Leone has launched a strategic plan 2019–2022 that includes a large focus on new large infrastructure. This plan includes the Lungi Bridge project, a 7-km bridge for connecting the capital city Freetown with the Lungi airport, procured with a public–private partnership (PPP) model. This study aims to reflect on seven issues regarding the plan implementation and the procurement of the Lungi Bridge project.Design/methodology/approachThis study uses case study analysis (Sierra Leone’s infrastructure plan), in which existing literature and expertise is applied to discuss/reflect the implications for the future.FindingsAmong other reflections, this study addresses the benefits and risks of using a PPP option with non-sovereign guarantee, off-balance sheet treatment and a special purpose vehicle for multiple projects; this study also discusses the social risk of misperceiving the bridge as a basic essential transport option (non-voluntary).Practical implicationsThe reflective process can contribute significantly to policymakers in Sierra Leone and its neighbour countries, as it is a contextualised analysis for the country.Originality/valueMany studies have addressed existing PPP projects and contexts for low-income countries. However, to best of the author’s knowledge, the analysis of a single government infrastructure plan has not been addressed. Moreover, for the Sierra Leone’s context, this is unique.

Tax and financial accounting of write-off of destroyed assets under special conditions

The purpose of the article is to investigate changes and innovations in tax and financial accounting regarding the write-off of destroyed assets of enterprises under special conditions. Methods. In order to achieve the aim, the conducted research required the use of general and special methods of scientific knowledge. The following research methods were chosen: the method of analysis and synthesis was used to formulate both the topic and the purpose of the research; the method of content analysis was applied for the purpose of in-depth study of the scientific and practical literature on the subject of the study; the method of critical analysis was used to find undisclosed or incompletely resolved problem aspects. The method of system analysis was used by the authors in order to reveal the consequences of changes and innovations in tax and financial accounting of the write-off of destroyed assets of enterprises in special conditions. The method of going from abstract to certain is necessary to assess the effects of the adopted legislative and other changes on the accounting and tax reporting of the enterprise. The results. The analysis of changes and innovations regarding the financial and tax accounting of the write-off of destroyed assets showed that the owners of enterprises suffer huge losses in special business conditions. There is a need to reflect such transactions in financial and tax accounting. For this, first of all, you need to draw up an inspection report; secondly, to conduct and draw up an inventory report as part of a permanent or newly created inventory commission; thirdly, to obtain a certificate from the TPPU certifying the destroyed property. The problem of the relationship between taxpayers and fiscal authorities represented by the DPS is a different approach to the interpretation of the same events. What is more, tax officials are trying to maximize budget revenues, sometimes despite the absurdity of the counterarguments put forward. Thus, the write-off of destroyed assets, de facto, cannot bring any economic benefits to its owner, since they are not subject to accounting even at the final or initial cost, therefore the calculation of tax liabilities from VAT. For accounting purposes, sub-account 977 "Other costs of ordinary activities" is used, since no other account is provided for recording extraordinary expenses (losses) in the Chart of Accounts. Off-balance sheet account 072 "Unreimbursed shortages and losses from spoilage of valuables" is used to account for losses caused by loss of property. Novelty. For the first time, a systematic overview of changes and innovations regarding the financial and tax accounting of the write-off of destroyed assets of the enterprise in special conditions is given. Practical value. The presented approach can be useful for the educational and methodological work of teachers, scientific work and graduate students, other specialists, and students of specialty 071 "Accounting and Taxation". Keywords: special conditions, martial law, financial accounting, tax accounting, write-off accounting, destroyed property.

Off-balance sheet activities and scope economies in U.S. banking

Propelled by the recent financial product innovations involving derivatives, securitization and mortgages, commercial banks are becoming more complex, branching out into many “nontraditional” banking operations beyond issuance of loans. This broadening of operational scope in a pursuit of revenue diversification may be beneficial if banks exhibit scope economies. The existing (two-decade-old) empirical evidence lends no support for such product-scope-driven cost economies in banking, but it is greatly outdated and, surprisingly, there has been little (if any) research on this subject despite the drastic transformations that the U.S. banking industry has undergone over the past two decades in the wake of technological advancements and regulatory changes. Commercial banks have significantly shifted towards nontraditional operations, making the portfolio of products offered by present-day banks very different from that two decades ago. In this paper, we provide new and more robust evidence about scope economies in U.S. commercial banking. We improve upon the prior literature not only by analyzing the most recent data and accounting for banks’ nontraditional off-balance sheet operations, but also in multiple methodological ways. To test for scope economies, we estimate a flexible time-varying-coefficient panel-data quantile regression model which accommodates three-way heterogeneity across banks. Our results provide strong evidence in support of significantly positive scope economies across banks of virtually all sizes. Contrary to earlier studies, we find no empirical corroboration for scope diseconomies.

A transparent transition? An investigation of firm disclosure regarding the expected impact of the new lease standard

AbstractThe Securities and Exchange Commission (SEC) requires firms to provide disclosures on the expected financial statement impact of newly issued accounting standards that have yet to be adopted. In this study, we explore the extent, nature, and timeliness of disclosures regarding the expected impact of the new lease standard in the transition period (2016–2018). We find that 62% of sample firms provide no firm‐specific disclosure regarding an expected increase in lease liabilities in the first year of the transition, which is unexpected given the clear balance sheet impact of the new lease standard. We investigate the determinants of timely disclosure and find a positive association with operating lease activity. Given concerns that firms will seek alternate vehicles for off‐balance‐sheet (OBS) financing under the new lease standard, we investigate changes in lease activity and disclosures for a sample of firms with extreme decreases in operating lease activity. We find a downward trend in operating lease activity around the passage of the new lease standard, but find few firms disclosing expected changes to their leasing activity. Our evidence suggests that information in early transition period disclosures, or lack thereof, may provide important signals for assessing lease liabilities and overall debt levels under the new lease standard.

Operating Leases and Credit Assessments: The Role of Main Banks in Japan

ABSTRACTThis study examines how Japanese banks evaluate off-balance sheet operating leases in their credit assessments. Using a sample of 6,985 firm-year observations in Japan over the period 2001 to 2017, we find that banks in Japan evaluate off-balance sheet operating leases in certain circumstances. First, we find that banks evaluate such leases when firms have a strong relationship with a main bank. Second, banks assess firms' credit risk by evaluating operating leases if there is a strong main bank relationship especially when estimation reliability is low. We uncover robust results by controlling for the systematic characteristics of a strong main bank relationship. Our study thus suggests that the main bank relationship plays the important role of conveying the off-balance sheet operating leases in loan contracts in Japan.