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Net interest spread is the difference between the interest rate a financial institution earns on its assets, such as loans and investments, and the interest rate it pays on its liabilities, such as deposits or borrowings. This spread is a key profitability metric for banks and other financial institutions, as it measures the difference between income generated from lending and the cost of funds. A wider spread indicates higher profitability.
If a bank earns an average interest rate of 5% on its loans and pays an average of 2% on deposits, the net interest spread is 3%.
• The difference between the interest earned on assets and the interest paid on liabilities.
• A key measure of profitability for financial institutions.
• A wider spread means more income relative to the cost of funds.
It’s the difference between the interest rate earned on assets and the interest rate paid on liabilities by a financial institution.
It helps measure a bank’s profitability by showing the difference between its lending income and borrowing costs.
If lending rates increase faster than borrowing costs, the spread widens, improving profitability.
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