Generally obs is risk increasing; most often banks use them to avoid regulations and lower regulatory capital requirement and to take on risk that would lower the strength of the balance sheet.

The off-balance sheet activities are in many instances part o the common business of banking , and not necessarily intended to avoid the regulations as argued by my friend Mo Chaudhury of McGill University, Canada : For example, lines of credit granted by the bank to its customers, the Letters of Credit in the international trade transactions and guarantees given therein by the banks to the exporters, any bank guarantees and contingency liabilities not booked in the balance sheets, the forward market transactions in currencies , and all other financial derivative transactions made often to hedge the risks in the balance sheets like interest rate risks .Many of the forward market transactions like buying and selling currencies are often to cater to the requirements of the customers for hedging their financial and business risks. They are all off-balance sheet activities meant to reduce the risks of the bank customers and of banks themselves in their banking books . If bank's rate sensitive assets are greater than rate sensitive liabilities, if interest rates decline in future , they are exposed to loss , and this can be hedged through an interest rate swap of paying the floating rate and receiving a fixed rate . Taking an interest rate swap is an example for an off-balance sheet activity. Having said all that positive activities, sometimes some banks indulge in speculative risk taking off-balance sheet activities also. However, regulators are trying to prevent that by even limiting the proprietary trade in financial markets by the banks directly and indirectly.

Thanks, Paul, for your comment.

The intriguing question is why all the activities that you rightfully mention are not booked on the balance sheet to make it more transparent and representative of the bank's business. Any deal, credit guarantee or hedging swap or anything else, can be marked to market or model and thus can be entered as an asset (positive) or liability (negative); the notional amounts can be in footnotes to balance sheet. As you all know, for an initial no payment transactions like an at-market swap position, the cumulative P&L (gain or loss) is its fair value.

Is any position, valued at zero, initially or later, risk-free (market, credit, liquidity,..) meaning guaranteed to remain zero value? Of course, as all of you are aware, the answer is no. In fact, they can be deadly as the financial crisis showed (credit guarantee/ mortgage insurance, CDS most prominently).

The Accounting standards setting boards and the regulatory agencies are trying to catch up but are always lagging the complex and exploding world of financial innovations and how the financial institutions keep evading a transparent disclosure of their business and associated risks.