Question

A bank could reduce the magnitude of its negative gap (make it closer to zero) by:

A) decreasing its long-term securities as a percentage of total assets

B) increasing its short-term deposit funding as a percentage of total assets

C) using more short-term non-core purchased liabilities

D) all of the above

E) none of the above

Answer 1

The answer is B) increasing its short-term deposit funding as a percentage of total assets.

A bank could reduce the magnitude of its negative gap (make it closer to zero) by:

A) decreasing its long-term securities as a percentage of total assets

B) increasing its short-term deposit funding as a percentage of total assets

C) using more short-term non-core purchased liabilities

D) all of the above

E) none of the above

This is due to the reason that a negative gap, or a ratio less than one, occurs when a bank's interest rate sensitive liabilities exceed its interest rate sensitive assets. The ratio is a measure of the difference between rates on short term assets and short term liabilities. In order to improve the negative ratio, we will increase short term assets.