Final answer:
When an ADI purchases financial instruments issued by non-customers, it leads to an increase in assets on the balance sheet. Liabilities are not directly affected by this transaction. This is a critical consideration for understanding a bank's financial position and risk management.
Step-by-step explanation:
When an Authorized Deposit-taking Institution (ADI) purchases financial instruments issued by non-customers, it is exchanging one type of asset (cash) for another (the financial instrument), which leads to an increase in that particular type of asset on the balance sheet. Therefore, the correct answer to the question is: a) Assets increase. The purchase of these financial instruments does not directly affect the ADI's liabilities unless this purchase is financed through incurring new debts.The money listed under assets on a bank balance sheet may not actually be in the bank because of the asset-liability time mismatch, where customers can withdraw a bank's liabilities in the short term, but the repayment of its assets often occurs in the long term.
During this time, the bank might use the funds to extend loans or purchase securities.Understanding balance sheets is critical when considering the content loaded concerning ADI's purchase of financial instruments issued by NON customers, as this affects the overall financial position and risk management strategies of the bank.