A bank can lower its leverage risk by

Question

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By more closely matching the average maturity of its assets and liabilities, the bank can lower its leverage risk. This is because a mismatch in maturity can cause a bank to face liquidity problems when its liabilities start to come due before its assets, which can lead to default risk. By aligning maturities, the bank can manage its cash flow and reduce the risk of default. Issuing more stock (A) can help increase the bank's capital base, but it does not directly address leverage risk. Buying more securities and making fewer loans (B) can also be a useful risk mitigation strategy, but it could also lower the bank's profitability if not managed effectively. Taking in fewer deposits (D) would reduce the bank's funding base and could also limit its ability to make loans, which could hurt profitability.

A Bank Can Lower Its Leverage Risk by