Financial institutions and markets - Essay Example

There are a number of benefits of OBS activities that a given bank can reap. It has been mentioned earlier that the bank is required to make a committed, which it is expected to honor. As a consequence, the bank charges some amount of fee while making this commitment. This fee charged by the bank charges constitutes the initial benefit of the off-balance-sheet activities to the bank. The structure of the normal interest rate is also applicable to the commitment if it is a requirement that the bank honors this initial commitment.

This happens as the normal interest rate structure moves onto the bank’s balance sheet. However, the need to use either equity or deposits in funding the asset is an operation that the bank avoids. This is due to the fact that the original commitment by the bank never appears on the balance sheet. Possible additional deposit insurance premiums as well as reserve requirement balances are thus avoided by the bank as the bank improves its stream of earnings. A bank may encounter some risks while engaging in OBS activities, with the borrower’s credit risk being the primary risk on the bank’s asset’s side.

On many occasions, until the borrower encounters a credit-worthiness altering financial situation or problem, the borrower does not utilize the bank’s commitment. The other risk is the negative impact that the movement of the off-balance-sheet activities into the balance sheet has upon the foreign exchange and rates of interests of the bank. Off-balance-sheet mortgage-backed securities were created and also held during the financial crisis by the largest FIs. However, these are some associative losses with regard to these securities, which lead to the acquisition, failure and bailout of some of these FIs.

Additionally, the world’s economic as well as financial systems almost experienced some melt down. Based on