The Off-Balance Sheet Banking Risk of Large U.S. Commercial Banks

The Quarterly Review of Economics and Finance, Volume 33, Issue 1, Spring 1993, Pages 51-69

Posted: 7 Nov 2018

See all articles by M. Kabir Hassan

M. Kabir Hassan

University of New Orleans - College of Business Administration - Department of Economics and Finance

Date Written: 1993

Abstract

OBS banking activities have grwn rapidly in recent years. The risk-based capital requirements of OBS activities presume thatsome OBS activities expose banks to additional and potentially excessive risk. This study employs Ronn-Verma option pricing methodology to calculate implied asset risk, and examine the risk-behavior of OBS activities. This approach incorporates the non-linearity of an option pricing model, deposit insurance and regulatory closure rules. A pooled cross-section and time-series analysis reveals that OBS activities, in general, reduce total risk but do not affect systematic risk. The explanatory power of models is improved significantly when implied asset risk, instead of equity risk, is used to proxy for total risk. The results suggest that risk-based capital regulations of OBS activities may unduly penalize large banks.

Keywords: off-balance sheet, banking activities, capital requirement, bank risk, option pricing model, asset risk, time series

Suggested Citation

Hassan, M. Kabir, The Off-Balance Sheet Banking Risk of Large U.S. Commercial Banks (1993). The Quarterly Review of Economics and Finance, Volume 33, Issue 1, Spring 1993, Pages 51-69, Available at SSRN: https://ssrn.com/abstract=3264363

M. Kabir Hassan (Contact Author)

University of New Orleans - College of Business Administration - Department of Economics and Finance ( email )

2000 Lakeshore Drive
New Orleans, LA 70148
United States

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