CMA Final · Risk Management in Banking and Insurance · Operational Risk and Off-Balance Sheet Risk
Which of the following is an off-balance sheet exposure of a bank?
A standby letter of credit issued for a customer is an off-balance sheet exposure because it is a contingent obligation that becomes a funded asset only if invoked. Drawn credit limits, disbursed term loans and held government securities are recorded on the balance sheet.
- ACash credit limit fully drawn by a borrower
- BTerm loan disbursed to a manufacturer
- CInvestment in government securities held to maturity
- DStandby letter of credit issued on behalf of a customerCorrect
Explanation
A standby letter of credit is a contingent liability that does not appear as an asset on the balance sheet until invoked. Drawn cash credit, disbursed term loans and held securities are all funded on-balance sheet items.
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