Holding Clients’ Assets On a Balance Sheet and the Disadvantages

In our previous article, we explained the topic of holding clients’ assets off a company’s balance sheet. In this article, we will dive into the practice of entities holding clients' assets on-balance sheets, explore why some financial institutions follow this approach, and discuss the potential disadvantages. Additionally, we will discuss why iTrustCapital does not adopt this approach.

Understanding On-Balance Sheet Assets:

When financial institutions hold clients’ assets on their balance sheets, they record them in the company's financial statements. This means that the assets are considered part of the company's liabilities and net worth. The value of the company along with the clients' assets are directly tied to the financial health and performance of the institution.

Reasons why financial institutions follow this approach

There are several reasons why financial institutions may choose to include clients’ assets in their balance sheets.

Perception of Stability and Financial Strength

Holding clients’ assets can increase the perceived value of a financial institution. A larger balance sheet may project an image of stability and financial strength, potentially attracting more clients and investors.

Ease of Liquidity and Leveraging for Profits

Another reason financial institutions may opt for this approach is the ease of accessing clients' funds and leveraging their assets to gain profits. As mentioned in our other article, several companies in 2022 actively leveraged clients' assets entrusted to them as a way to raise funds. 

Accessibility to Capital Markets

A larger balance sheet may provide better access to capital markets, enabling companies to raise funds more easily through debt or equity issuance.

The Disadvantages

Multiple events in 2022 demonstrated the risks of the crypto industry’s common practice of including client assets on the balance sheet. There are numerous examples of companies betting or leveraging positions using client funds and then losing those assets. In many cases, it was the clients who ultimately lost assets despite not being the ones directly making those bets.

Additionally, this approach may limit transparency. This can make it more difficult for clients and investors to assess the true financial health of the institution, potentially leading to a loss of trust and credibility.

Incorporating clients' assets on balance sheets can lead to potential conflicts of interest, as the financial institution's interests may not always align with those of its clients. For instance, an institution might prioritize its balance sheet growth over the clients' best interests.

Moreover, this practice may attract greater regulatory scrutiny. Regulators might be concerned about the potential risks associated with this approach, leading to increased compliance costs and regulatory capital requirements.

Conclusion:

While holding clients' assets on the balance sheet can provide some benefits to financial institutions, it also comes with considerable disadvantages and risks. iTrustCapital, recognizing these drawbacks, opts not to follow this approach. By keeping clients' assets off-balance sheet, iTrustCapital can better align its interests with those of its clients, maintain transparency, and reduce the risks associated with incorporating clients' assets into its balance sheet. To learn more and open an account today!