A bank's net interest margin is likely to increase in which situation?

A bank's net interest margin, which is the difference between the interest income generated from assets and the interest paid on liabilities, is likely to increase when liabilities are less rate-sensitive than assets. This occurs because if a bank's assets react more to interest rate changes compared to its liabilities, the bank can benefit from a wider spread during periods of rising interest rates.

In such a scenario, when interest rates increase, the bank can raise the rates on its assets (like loans) faster than it raises the rates on its liabilities (like deposits). This results in higher income from loans while the expense of servicing deposits grows at a slower pace. Consequently, the bank's net interest margin widens, enhancing profitability.

When liabilities match the sensitivity of assets, the net interest margin tends to remain stable, as the changes in interest income and interest expense will move in tandem, limiting any potential gain in margin. If liabilities are more rate-sensitive than assets, the bank could see an erosion in its margin, as it may need to increase interest payments on its liabilities faster than it can increase interest income from its assets. Similarly, if assets are more rate-sensitive than liabilities, it increases the risk of a reduced margin during fluctuating interest rates, as rising interest