Ways banks can reduce a positive duration gap include taking on more long-term liabilities or taking on shorter term assets or variable rate assets. However, these changes will result respectively in a higher interest rate on liabilities and a lower rate on assets, since interest-rate risk is being passed on to customers.

Question

Quizplus · Accepted Answer

When a bank takes on more long-term liabilities or shorter term assets or variable rate assets to reduce a positive duration gap, it is essentially shifting the interest-rate risk onto customers. This would result in a higher interest rate on liabilities and a lower rate on assets, which is why the statement is true.

Ways Banks Can Reduce a Positive Duration Gap Include Taking