What is the Net Interest Rate Spread?
In banking, the net interest rate spread is the difference between interest earned on loans, securities, and other interest-earning assets and the interest paid on deposits and other interest-bearing liabilities.
How Does the Net Interest Rate Spread Work?
For example, let's assume XYZ Bank earned a weighted-average interest rate of 5% on its assets and paid a weighted-average interest rate of 3% on its liabilities. XYZ Bank's net interest rate spread would equal 5% - 3% = 2%. Publicly traded banks typically report their interest rate spreads in their regular disclosures.
Why Does the Net Interest Rate Spread Matter?
Intuitively, net interest rate spread is similar to profit margin. In general, the larger a bank's interest rate spread, the more it earns and the more it is therefore worth. When interest rates change, however, the interest a bank receives on its assets and pays on its liabilities fluctuates and can decrease income. Thus, it is important to monitor changes in net interest rate spreads as well as the size of those spreads.
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