Question

Why should a given bank make their asset duration less than their liability duration and increase their liability duration?

Answer 1

If a asset duration is less than their liability duration then duration gap will be negative and in this case when interest rates rises, liabilities will lose more value than assets and results in increase in firm's value. But if interest rates falls then liabilities will rise and decrease the firm's value.

When Bank manager finds that interest rates are rising, he tries to increase bank's liability duration so that value of liabilities goes down and firm's value gets increase.