What is Net Interest Income (NII)?
Net interest income is the difference between interest received from assets and interest paid on liabilities.
How Does Net Interest Income (NII) Work?
The formula for net interest income is:
Net Interest Income = Interest Received - Interest Paid
Let's assume XYZ Bank earns $1,000,000 for the month on its mortgage loans, commercial loans, and personal loans. It also pays $975,000 in interest to its depositors for their CDs, checking accounts, and savings vehicles. Using the formula above, XYZ Bank's net interest income is:
Net Interest Income = $1,000,000 - $975,000 = $25,000
Why Does Net Interest Income (NII) Matter?
In regard to banks, net interest income should go up as the yield curve steepens (long-term rates rise faster than short-term rates) because the bank is able to pay depositors a relatively low rate, but it can charge its borrowers a higher rate.
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