What does the net interest margin represent for a bank, and how is it affected by an inverted yield curve?

The net interest margin for a bank represents the difference between the interest earned on loans and other interest-bearing assets and the interest paid on deposits and other liabilities. An inverted yield curve can negatively affect the net interest margin by increasing short-term funding costs, which typically leads to a decrease in the margin.

The net interest margin is a key indicator of a bank's profitability, calculated as the difference between interest income from loans and interest expenses on deposits. When the yield curve inverts, it means that short-term interest rates are higher than long-term rates. This situation can increase the costs of short-term funding for banks, thereby reducing the net interest margin as banks may not be able to charge higher rates on long-term loans compared to what they pay for short-term deposits.