THE EFFECT OF OFF-BALANCE SHEET ACTIVITIES ON GLOBAL BANK RISK: EMPIRICAL STUDY WITH CAPITAL MARKET MODEL

Since off-balance sheet activities (OBSAs) have been reported in the notes of financial statements, the lack of information thereof has been the main concern for regulators, accountant, financial analysts, and investors. This study, using the quarterly data of the 300 largest US global banks, examines the impact of OBSAs on bank risk (both asset risk and systematic risk). This study finds a strong positive relationship between OBSAs and systematic risk, supporting the Leverage hypothesis and Tax Regulatory hypothesis. However, the negative relation between OBSAs and asset risk supports the Diversification hypothesis. These finding could be incorporated into designing a new framework (i. e., fair and full disclosure) to account for new financial instrument related to OBSAs.