Question

What does "the spread" mean to the bank's profitability?

Answer 1

The primary business of commercial banks is accepting deposits from its customers and making loans to its customers. It pays an interest on the deposits received and makes money from interest income from the loans it grants.

Interest rate spread refers to the difference between the average yield it receives from its customers and the rate it pays on its deposits. Interest rate spread is a big factor of a bank’s profitability. Banks are concerned with maintaining the spread between the rate paid on deposits and the rate received on loans. When the rate received from a bank’s loans is greater than the rate paid on deposits, the bank makes a profit. The higher the interest rate margin, higher the profit and lower the interest rate margin, lower its profit.