Banking Practice Exam

Decreasing asset sensitivity for a bank involves actions that generally reduce the bank’s exposure to interest rate fluctuations. When a bank has a high asset sensitivity, it means that its assets reprice faster than its liabilities, which can create risks when interest rates change.

Buying longer-term securities effectively reduces asset sensitivity because longer-term securities typically have lower reprice rates compared to shorter-term securities. These securities are less sensitive to immediate changes in interest rates, as they will not need to be repriced until their maturity, which can provide stability against volatility in interest rates in the short term. Consequently, having a portfolio with more longer-term securities helps to balance the repricing opportunities of liabilities, thereby decreasing the overall asset sensitivity.

Other options, like paying premiums on subordinated debt or shortening loan maturities, increase the speed at which assets can reprice, which does not contribute to decreasing asset sensitivity. Making fewer fixed-rate loans would also lead to greater asset sensitivity as the bank would have a higher proportion of assets that would reprice quickly with interest rate adjustments.