Off-balance-sheet items are contingent assets or liabilities where the potential economic benefit or loss is contingent on a future event.
Letter of Credit
A letter of credit (LOC) is a document that ABC Bank issues on behalf of its customer authorizing a third party to draw drafts on the bank up to a certain amount. It guarantees the on time payment from ABC Bank to the third party beneficiary.
Loan Commitments
A loan commitment is an agreement between ABC Bank and a borrower detailing the terms and conditions that ABC Bank will fund the loan to the borrower for a specified amount.
Guarantee
Guarantee can happen when ABC Bank backs up a loan or debt taken by its subsidiary in a foreign country.
Letter of Credit Issued by another Depository Institution
If ABC Bank takes a Letter of Credit issued by another Depository Institution, such as Federal Home Loan Bank (FHLB), this will be reported as ABC Bank's Off-Balance Sheet Liabilities.
Derivatives
Interest rate swap is a type of forward contract that typically involves the exchange of a fixed interest rate payment for a floating rate payment (such as LIBOR).
Interest rate futures is a type of futures contract that allows the future delivery of the interest-bearing asset from the seller to the buyer at a locked price.
Comments