During a period of rising interest rates, if a bank's liabilities are more rate-sensitive than its assets, what is the likely outcome for net interest margin?

When interest rates are rising, the bank's liabilities, which include deposits and borrowed funds, are affected first, often leading to a quicker increase in interest expenses than the income generated from assets such as loans and securities. If the bank has more rate-sensitive liabilities than assets, this means that the costs associated with the bank's funding sources will increase more rapidly than the income it receives from its interest-earning assets.

As a result, the net interest margin, which is the difference between interest income generated by assets and interest expense on liabilities, will likely decrease. This happens because a larger portion of the bank's income is going toward covering higher interest payments on liabilities compared to the incremental increase in income from rate-sensitive assets. Therefore, a sustained period of rising interest rates, in this scenario, puts downward pressure on net interest margin.