Off-balance-sheet operations

Banking transactions that were generally not required to be recognized on the balance sheet until the entry into force of International Accounting Standards in 2005 or the introduction of Basel II at the beginning of 2008 in the EU. These mainly include – contingent liabilities, such as sureties and guarantees, – irrevocable loan commitments, – deposit and variation margin obligations, – open derivative financial instruments including stock options, and – fiduciary transactions. Sometimes, banking services such as investment advice, asset management and securities trading are also included in off-balance sheet business, as well as securitization papers passed on to special purpose entities – Sachsen LB alone, which floundered in 2007 and was then taken over by Landesbank Baden-Württemberg, had almost EUR 18 billion disappear into “balance sheet nothingness” in this way. – Demand for off-balance sheet services from banks has increased sharply since 1980; at the same time, balance sheet business has become relatively less important for many institutions. – In application of Basel II, the supervisory authorities have established detailed capital adequacy requirements for some of these items, i.e. they require a level of equity backing to be calculated according to a predefined formula. In Germany, the corresponding provisions are monitored by the German Federal Financial Supervisory Authority (formerly the German Federal Banking Supervisory Office). – In the U.S., the Sarbanes-Oxley Act imposes very strict, detailed regulations on the unvarnished disclosure of all transactions that could now or later have a potential impact on the (listed) company. – See Absence capitalism, activity shifting, balance sheet driven, investor protection, guarantee, guarantee business, credit line, credit commitment, irrevocable, letter of comfort, buffer, setback effect, voting right criterion, subprime crisis, underpinning, securitization structure.

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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
E-mail address: info@ekrah.com
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