Net interest rate spreads – sometimes referred to simply as “interest spreads” or “net interest spreads” - are the central pillar of the lending business. They are determined by both the active and passive business activities of banks and other financial services providers.
Banks actively lend money to borrowers – as personal loans, mortgages or business loans, for example – and charge interest on loans. In order to finance their active lending business, banks use money deposited into savings accounts and other banking solutions which make up the bank’s passive business activities.
Interest paid for customer assets represents the cost of capital. The bank’s profits are made up of the difference between the interest paid to depositors for their savings and the interest charged to borrowers for loans. That difference is known as the net interest rate spread.
In order for a bank to operate at a profit, the net interest rate spread must be positive – meaning that the bank earns more in interest from loans than it pays in interest to depositors.