Explain what shapes how banks and insurance companies manage their balance sheets

Banks and insurers manage assets and liabilities together. Banks fund with short-term deposits and borrowings, so they focus on the gap in interest rate sensitivity, liquidity and capital ratios. A key measure is the leverage-adjusted duration gap: DA − (L ÷ A) × DL. With asset duration 4, liability duration 3 and liabilities at 90% of assets, the gap is 1.3, so equity falls when rates rise. Insurers invest premiums to meet claims; life insurers hold long bonds to match long liabilities, while property and casualty insurers hold shorter, more liquid assets because claims are less predictable. A trap is assuming a bank with matched durations but high leverage has no rate exposure; the leverage term matters.