The Determinants of Off-Balance-Sheet Banking Risk: The U.S. and International Evidence

This study employs the logistic diffusion model of financial innovations. In order to trace the determinants of OBS guarantees we consider that OBS guarantees in the banking industry as a financial innovation follows a time diffusion trend. In addition to the time trend factor we include a regulation pressure factor to test the bank regulatory hypothesis and non-regulatory bank-specific factors to test the market discipline hypothesis. We also include macroeconomic factors to test for the general economic notion impact on U.S. banks\u27 OBS guarantees. The results reject the regulatory tax hypothesis and conclude that regulations have no major impact in determining banks OBS guarantees usage. Another major result is that banks OBS guarantees are decreasing over time and it is no longer considered as a financial innovation in the U.S. banking industry; banks seem to have replaced guarantees with other OBS activities like derivatives. While the banks\u27 regulatory factor is not a major determinant of OBS guarantees, bank\u27s nonregulatory and macroeconomic factors are significant in determining OBS usag