Hello
I would like to ask some basic questions about cross currency swap transactions which are realized in off-balance sheet activities in banks.
Firstly; how the banks do find enough cash local and foreign currency to realize these transactions ?
Which accounts in balance sheet could be used to finance off-balance sheet activities (cross currency swap ) ?
Sincerely
I'm sorry to be the skunk at the garden party here, but, IMHO, it should be unlawful for any company whose stock is publicly held to invest in off-balance-sheet activities. In my view, no such activity should be allowed or even be possible. If a publicly-held company engages in such activity, the names of the officer(s) who knew about or engaged in or approved such activity should be publicly disclosed. If that activity is illegal, then such officer(s) should be prosecuted to the full extent of the law.
Dear Pro Engin
with the first question, we know that in a bank they have the treasury department which will have the function of conducting the currency swap, and of course this bank will use their fund to support for it, but the swap operation as you know that it is a dual exchange operation, therefore this duty is to maximize their profits from both.
Second question, the off - balance sheet activities will not be presented in balance sheet until it actually happens.
Best
Canh
More than any other line of business, banks should be prevented from engaging in ANY off-balance-sheet activities. If that requires changing GAAP and/or IFRS, so be it.
As Nguyen Phuc Canh stated, these positions are called "off balance" because they are NOT on the balance sheet. Also there is no cash needed. Off balance are the risks that might come in the future onto the balance sheet. Example: The bank underwrites a guarantee that its client will finish a large Container Ship by 2020. Apart from the fees, there is no current cashflow and if the ship is ready on time, there won't be any large cash flows in the future either. However, there is a risk that the bank has to pay a large amount in 2020 if things go wrong. In order to inform the shareholders and other stakeholders this risk must be revealed somewhere. It does not belong on the balance sheet. Hence the need for off-balance sheet accounting. Your currency swap has a similar characteristic in the sense that it contains the risk of large negative future cash flows. There is nothing wrong with these activities itself.
However, things become tricky if off-balance sheet activities are created to avoid on-balance sheet regulation. E.g. if regular loans get securitised and sold in combination with off-balance sheet guarantees to the buyer. This way banks were able to avoid bank capital regulation, because there were loopholes in the regulation of off-balance sheet risks. Regulation and financial innovation is a constant game of cat and mouse. There will never be a perfect solution but this might help a little: http://onlinelibrary.wiley.com/doi/10.1111/1759-3441.12124/abstract
Dear @axelwieneke
The banking system of emerging countries and developing countries have open FX position in their on balance sheet but this gap is closed by off balance sheet transactions. Cross currency swap is first tool for creating long FX position in off balance sheet. My problem is how the banks finance exactly their cross currency swap transactions through the on balance sheet ?
Dear Engin
actually it is not financed by the balance sheet position, it is rather "financed" by the revenue you generate from the position you have hedged with a cross currency swap. For example you have 1m USD loan exposure, where you want to get rid of the currency risk. Hence you get the cross currency swap where you swap the payments expected in USD from the repayment and interest payment for the USD loan into the currency you prefer. So let's say that is monthly USD 10k interest, then your counterpart would receive that, whereas you receive the amount in let's say dinar at a fixed rate with some discount for the swap arrangement. So no impact on your balance sheet except that you got rid of your USD currency risk and probably will recognise less income from this transaction as you have to pay a swap premium.
Hope that helps.
Regards Eckart
I agree with you Eckat , since their is no direct relationship between off balance sheet items and the B/S position. thus, its financed by the generated revenues from the financial position of cross currency swap.
Dear @Eckart_Koerner and @salem
Please look at annex file
LM is local currency
FX is foreign currency