Final answer:
Issuing financial instruments to non-customers increases both liabilities and assets on an ADI's balance sheet, leaving the net worth unchanged initially. Banks act as intermediaries and manage risks such as asset-liability mismatches and fluctuations in asset values.
Step-by-step explanation:
When Authorized Depository Institutions (ADIs) issue financial instruments to non-customers, this activity increases liabilities on their balance sheet. This is because the issued financial instruments, like bonds or certificates of deposit, represent obligations the ADI owes to outsiders and thus are recorded as liabilities. Concurrently, the proceeds from these instruments contribute to the asset side of the balance sheet, typically in the form of cash or cash equivalents, hence increasing assets. The overall effect is balanced out, as both assets and liabilities increase by the same amount, leaving the bank capital unaffected in the immediate term.
To provide additional context, the role of banks in the financial market includes being financial intermediaries. They facilitate transactions and manage the potential risks associated with asset-liability time mismatch and changes in asset value due to loan defaults or fluctuating interest rates, which can impact the overall health of the bank's balance sheet.