The use of off-balance-sheet activities allows banks to practice regulatory tax-avoidance.

Question

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Off-balance-sheet activities refer to financial transactions or arrangements that are not recorded on a company's balance sheet, such as derivatives or securitization. While these activities can provide benefits such as risk hedging or income generation, they can also be used to hide certain risks or avoid regulatory constraints. Banks may use off-balance-sheet activities to lower their reported capital ratios, which can reduce their regulatory burden or allow them to take on more risk. Additionally, some off-balance-sheet arrangements may be structured in a way that allows banks to avoid taxes or other regulatory requirements.

The Use of Off-Balance-Sheet Activities Allows Banks to Practice Regulatory