Financial institutions and markets Essay Example | Topics and Well Written Essays - 750 words

Financial institutions and markets - Essay ExampleThere are a number of benefits of OBS activities that a given intrust 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 perpetration. 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 fate that the bank honors this initial commitment. This happens as the normal interest rate structure moves onto the banks 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 ba nk as the bank improves its stream of earnings.A bank may encounter some risks while engaging in OBS activities, with the borrowers credit risk being the first-string risk on the banks assets side. On many occasions, until the borrower encounters a credit-worthiness mend financial situation or problem, the borrower does not utilize the banks commitment. The other risk is the prejudicial 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 worlds economic as well as financial systems almost experienced some melt down. found on