A bank manager concerned about interest income who expects interest rates to fall and who knows the bank currently has a positive gap should ________ rate-sensitive assets and ________ rate-sensitive liabilities.

Question

Quizplus · Accepted Answer

When interest rates are expected to fall, a bank manager concerned about interest income would want to decrease rate-sensitive liabilities to ensure that the cost of funds does not decrease in line with the interest rate, thereby maintaining net interest income. At the same time, rate-sensitive assets should be increased as they offer the possibility of higher returns as interest rates decline. This strategy is known as asset/liability management and involves shifting the bank's balance sheet to take advantage of interest rate movements.

A Bank Manager Concerned About Interest Income Who Expects Interest