Bank Risk Exposure, Bank Failure and Off Balance Sheet Activities: An Empirical Analysis for U.S. Commercial Banks
36 Pages Posted: 11 Jun 2012 Last revised: 14 Oct 2012
Date Written: June 10, 2012
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
Keywords: off balance sheet activities, derivatives, credit substitutes, financial fragility, commercial banks
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