How can structural risks be reduced effectively?

Reducing structural risks effectively involves managing the maturity profile of assets and liabilities to ensure they align and reduce the likelihood of liquidity mismatches or refinancing risks. Minimizing dispersion of maturities helps to create a more predictable cash flow scenario, allowing for better alignment of the timing of interest payments and principal repayments. When maturities are clustered rather than dispersed widely, the impact of interest rate fluctuations on the overall portfolio can be more easily managed, leading to reduced volatility and risk.

When the maturities of assets are closely matched with liabilities, it minimizes the risk of having to refinance at unfavorable rates or encountering liquidity issues at inopportune times. This strategy can also enhance risk management by reducing the potential for asset-liability mismatches, which can be particularly critical in environments of changing interest rates.

In contrast, increasing asset duration could lead to a higher sensitivity to interest rate changes, potentially increasing risk rather than reducing it. Maximizing liabilities also generally increases financial risk, as it exacerbates leverage. Achieving higher interest rates may improve returns but does not inherently manage structural risks effectively and could introduce additional volatility. Thus, minimizing dispersion of maturities stands out as the most effective method for controlling structural risks.