Banks often convert on-balance-sheet banker's acceptances into off-balance-sheet letters of credit for the purpose of minimizing total assets and thus improving performance ratios such as ROA.

Question

Quizplus · Accepted Answer

Banker's acceptances and letters of credit serve different purposes and are not converted from one to the other for the purpose of minimizing total assets. Banker's acceptances are short-term debt instruments, while letters of credit are guarantees of payment. The decision to use one over the other is based on the needs of the transaction, not on balance sheet management strategies.

Banks Often Convert On-Balance-Sheet Banker's Acceptances into Off-Balance-Sheet Letters of Credit