Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Net Interest Rate Spread

What it is:

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 it works (Example):

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 it Matters:

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.