The Analysis of the Existence of the Hypothesis of Adverse Selection on the Relationship between Off-balance Sheet Items and the Bank's Risk

Document Type: Research Paper


Department of Accounting, Arak Branch, Islamic Azad University, Arak, Iran.


Balance sheet itself does not specify and show all the activities that a bank pays. Because banks can do many swap contracts and obligations, exchange, and commitments Outside of the balance sheet. To such activities and exchange that will not appear on the balance sheet, are saying off-balance sheet activities. These items are usually reported in the notes to the attached financial statements. One of the reasons for conducting the activities of off-balance sheet by the banks is the interest rate risk coverage. However, the use of these tools for risk management leads to multiple different sorts of risk and that the overall judgment about the outcome of the risk management of the off-of-balance sheet activities has met with ambiguity. The present research has examined the relationship between risk and the items of off-balance sheet under the hypothesis of Adverse selection with the use of the Iran's nine commercial bank data. The results show that this hypothesis isn’t able to respond off- balance sheet activities behaviour in Iran


Main Subjects

[1] Ahmad Manjoo, Faizal, Securitization: An Important Recipe for. Islamic Banks, Ravad Journal, 2005, 21 (4).

[2] Bochokoa, veronica , off- balance sheet activities and the assessment of off-balance sheet credit risk management in the banking sector of the Czech Republic, Econometric review, 2012, 3 (4).

[3] Calms.A. and Theort M., Off balance sheet risk in banking: the case of standby letters of credit, federal reserve bank of San Francisco, econometric review, 2008, 2, (1).

[4] Doran, Miguel; Lozano-vivas, Ana, Off-balance-sheet activity under adverse selection: The European experience, 2013, 3, (1).

[5] Demsetz, Rebecca; Philip, Strahan, Diversification, size, and risk at bank holding companies, Journal of money, credit and banking., 1997, 4 (2).

[6] Hemenway, D., "Propitious selection", Quarterly Journal of Economics, 2009, 3, (105).

[7] Kabir.M.Hassan, The off-balance sheet banking risk of large U.S. commercial bank. Journal of Economic Perspectives., 1991, 2 (5).

[8] Karimi, Mohamad: shojaa, Mehdi, Investigating the off-balance sheet activities changes in globalbanking and Comparison with Iran banking, 16th banking without riba conferences, 2010 (in Persian)

[9] Khalaatbari, Firooze, Off-balance sheet items, Hesabdar Journal, 1986, 1, (in Persian)

[10] Modares.A& Taleei Fard. A.,The effect of off-balance sheet items on bank's risk and return, Audit Journal, 2010, 1. (In Persian)

[11] Théoret, Raymond, Calmès, Christian, The impact of off-balance-sheet activities on banks returns: an application of the ARCH-M to Canadian data, Journal of Economic Perspectives., 2010, 3 (3).

[12] Varian, Hal R., Intermediate microeconomics: a modern approach. M.c.Gerohil, 2001.