Business and Personal Finance Dictionary

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• LIABILITY SENSITIVE
  
  Describes an entity's position when an increase in interest rates will hurt the entity and a decrease in interest rates will help the entity. An entity is liability sensitive when the impact of the change in its assets is smaller than the impact of the change in its liabilities after a change in prevailing interest rates. This occurs when either the timing or the amount of the rate changes for assets cause interest income to change by more than the change in interest expense. The impact of a change in prevailing interest rates may be measured in terms of the change in the value of assets and liabilities. In that case, a liability sensitive entity’s economic value of equity decreases when prevailing rates rise or increase when prevailing rates fall. Alternatively, the impact of a change in prevailing rates may be measured in terms of the change in the interest income and expense for assets and liabilities. In that case, a liability sensitive entity’s earnings or net income decreases when prevailing rates rise and increases when prevailing rates fall.
  
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