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Do traditional off-balance sheet exposures increase bank risk?

Mamiza Haq, David Tripe and Rama Seth

Journal of International Financial Markets, Institutions and Money, 2022, vol. 80, issue C

Abstract: Banks’ off-balance sheet activities are among the many factors blamed for the risk-taking that led to the 2007–2008 financial crisis. We test whether and how off-balance sheet exposures influenced risk-taking at publicly traded commercial banks in the G-7 countries between 1998 and 2018. Contrary to expectations, we find strong evidence that larger off-balance sheet exposures are associated with lower aggregate and idiosyncratic risk but higher tail risk. Further, we observe a non-linear relationship between off-balance sheet activities and risk. Our results suggest that placing absolute limits on OBS activities might increase bank risk-taking.

Keywords: Bank risk; Off-balance sheet items; Financial crisis; G-7 countries (search for similar items in EconPapers)
JEL-codes: G02 G21 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.intfin.2022.101627

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Journal of International Financial Markets, Institutions and Money is currently edited by I. Mathur and C. J. Neely

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