Banking Practice Exam 2025 – 400 Free Practice Questions to Pass the Exam

To decrease liability sensitivity, a bank can pay premiums on longer-term deposits. By offering higher interest rates or premiums on these deposits, the bank encourages customers to commit their funds for a longer period. This reduces the bank's exposure to interest rate fluctuations because longer-term deposits lock in funding at current rates, providing stability against rising interest rates in the future. This action helps the bank manage its balance sheet more effectively and provides a cushion against sudden withdrawals or changing market conditions.

The other options might seem appealing at first glance but do not effectively decrease liability sensitivity. Buying longer-term securities (the first option) would influence the asset side but may not significantly address the bank's sensitivity to its liabilities. Attracting more non-core deposits (the second option) could introduce volatility as these deposits are often less stable compared to core deposits. Increasing floating rate loans (the third option) would generally increase sensitivity to interest rates, as the bank's income from these loans would fluctuate with market rates, potentially heightening rather than decreasing sensitivity. Thus, paying premiums on longer-term deposits is the most effective strategy among the options presented.