Fee based & off balance Sheet activities

Balance Sheet activities involve the management of a company’s assets, liabilities, and equity, as reflected on its balance sheet, a financial statement that provides a snapshot of the company’s financial health at a specific point in time. These activities are critical for maintaining financial stability, optimizing asset use, ensuring liabilities are managed wisely, and safeguarding or enhancing shareholder equity. For instance, acquiring assets to generate revenue, taking on debt to finance growth, or issuing equity to raise capital are key activities. Effective balance sheet management helps in liquidity management, controlling debt levels, and strategic planning for growth or investment. By regularly reviewing and adjusting the balance sheet through these activities, companies aim to improve their financial position, meet obligations, and increase value for shareholders, playing a vital role in overall financial strategy and operational decision-making.

Fee-based Activities

Fee-based activities are services provided by banks or financial institutions that generate income through fees rather than through interest from lending or investing.

• Asset Management Services:

Managing assets on behalf of clients for which the bank earns a management fee.

• Advisory Services:

Providing advice on mergers, acquisitions, restructuring, and other corporate finance services, earning advisory fees.

• Brokerage Services:

Facilitating the buying and selling of securities, currencies, and other financial instruments for clients and earning brokerage fees.

• Transactional Services:

Offering services like payment processing, wire transfers, and issuing letters of credit, which generate transaction fees.

• Custody Services:

Holding and managing securities and other assets for clients, for which custody fees are charged.

Fee-based activities are essential for diversifying revenue streams beyond traditional interest income, helping banks reduce their dependence on the economic cycle’s interest rate fluctuations.

Off-Balance Sheet (OBS) Activities

Off-balance sheet activities involve transactions or agreements that do not appear on the institution’s balance sheet because they do not involve direct ownership of assets or obligations. However, they can significantly impact the risk and financial profile.

• Guarantees and Letters of Credit:

Commitments made by the bank to pay third parties if specific conditions are met, ensuring transaction completion.

• Derivatives and Hedging Activities:

Contracts like futures, options, and swaps used for hedging risks or speculative purposes, where the values are derived from underlying assets’ performance.

• Securitization of Assets:

Pooling various types of contractual debt (e.g., mortgages, credit card debt) and selling the consolidated debt as bonds to investors, removing the loans from the bank’s balance sheet.

• Commitments to Extend Credit:

Agreements to provide loans in the future, which might or might not be drawn upon by the client.

Key differences between Fee based and off balance sheet activities