Off-Balance Sheet Funding, Voluntary Support and Investment Efficiency

59 Pages Posted: 14 Aug 2018 Last revised: 28 Mar 2019

See all articles by Anatoli Segura

Anatoli Segura

Bank of Italy

Jing Zeng

Frankfurt School of Finance and Management gGmbH

Date Written: March 22, 2019

Abstract

Financing an investment off-balance sheet gives a bank the option, but not the obligation, to voluntarily support debt repayments using its on-balance sheet funds when the investment fails. Such flexibility, which is absent with on-balance sheet funding, allows the bank to signal information about the quality of its future projects, improving investment efficiency. Yet, off-balance sheet funding reduces the bank's skin-in-the-game and effort incentives. Off-balance sheet funding with voluntary support is optimal for activities that are rapidly growing or negatively correlated with existing assets. The model yields testable predictions on the relationship between off-balance
sheet debt spreads and sponsors' characteristics.

Keywords: off-balance sheet funding, voluntary support, signaling, optimal funding mode

JEL Classification: D8, G11, G2

Suggested Citation

Segura, Anatoli and Zeng, Jing, Off-Balance Sheet Funding, Voluntary Support and Investment Efficiency (March 22, 2019). Available at SSRN: https://ssrn.com/abstract=3222658 or http://dx.doi.org/10.2139/ssrn.3222658

Anatoli Segura (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Jing Zeng

Frankfurt School of Finance and Management gGmbH ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

HOME PAGE: http://www.zengjing.net

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