Off-Balance Sheet Activities

• Financial guarantees
– Standby letters of credit
– Bank loan commitments
– Note issuance facilities
• Derivatives
– Currency and interest rate swaps
– Over-the-counter options, futures, and forwards
– Other off-balance sheet activities
– U.S. banks and international expansion
 Off-balance sheet activities
• Market risk:
– Wild gyrations in interest rates in the 1980s.
– Turmoil in emerging markets in the 1990s.
– Periodic volatility in global financial markets.
• Off-balance sheet activities to deal with market risk.
– Commitments based on a contingent claim -- an obligation by a
bank to provide funds (lend funds or buy securities) if a
contingency is realized.
– Two broad categories: financial guarantees and derivative
instruments.
– Transforming deposit/lending institutions into risk management
institutions.
– Tremendous growth of off-balance sheet activities of large banks.