Question

Off-balance sheet activities involving guarantees of securities and back-up
a) credit lines have no impact on the risk a bank faces.
b) increase the risk a bank faces.
c) greatly reduce the risk a bank faces.
d) slightly reduce the risk a bank faces.

Answer 1

Answer:

B) increase the risk a bank faces.

Explanation:

Off-balance sheet activities include all the bank's activities regarding assets, debts or other financing activities that are not presented in the bank's balance sheet, e.g. issuance of guarantees, commitments to make loans, etc.

Banks incur in this type of activities because generally they charge fees for them (increase revenue) without affecting measures of indebtedness like debt to equity ratio.