Question

Which of the following is an untrue statement regarding off-balance sheet financing?

1) Off-balance sheet financing can run into the same problems as on-balance financing as seen in the financial crisis.
2) Off-balance sheet financing serves a different economic function than on-balance financing.
3) Retail investors may be seeking to put their money with MMMFs since their investment exceeds the level of insured protection provided by the FDIC.
4) Banks in the off-balance financing business include not only traditional banks but also investment banks and insurance companies.

Answer 1

The untrue statement regarding off-balance sheet financing is that it serves a different economic function than on-balance financing, as both types of financing are used to manage capital and risk with differing accounting treatments.

Step-by-step explanation:

The untrue statement regarding off-balance sheet financing is option 2): "Off-balance sheet financing serves a different economic function than on-balance financing." This statement is not accurate because off-balance sheet financing is often used to achieve similar economic objectives as on-balance financing, like raising capital or managing risk, but with different accounting treatments.

1) Off-balance sheet financing can indeed run into the same problems as on-balance sheet financing, as seen during financial crises when hidden liabilities or risks can materialize and affect a company's financial health. 3) Retail investors may look to put their money in money market mutual funds (MMMFs) because their investment might exceed the level of FDIC protection, seeking higher returns or perceived safety beyond insured bank accounts. 4) Banks involved in off-balance sheet financing include a broad range of financial institutions such as traditional banks, investment banks, and insurance companies.