Question

1. Which measure should pick up on high salaries: Net Interest Income or Net Income?

2. Which measure should pick up on high fee income: Net Interest Income or Net Income?

3. Which measure better picks up on high deposit interest: Net Interest Income or Net Income?

4. Which measure better picks up on the efficiency of the bank’s core business operations: Net Interest Income or Net Income?

5. Which of the banks above has a higher Net Interest Margin?

6. Which type of bank typically has a higher ROA: Giant banks or Tiny banks?

7. Which type of bank typically has a lower ROE: Giant banks or Tiny banks?

8. Which type of bank typically has the narrowest Net Interest Margin: Giant banks or Tiny banks?

9. What does that mean about the source of income for Giant banks as opposed to Tiny banks?

Answer 1

Net interest income is a financial performance measure that reflects the difference between the revenue generated from a bank's interest-bearing assets and expenses associated with paying on its interest-bearing liabilities. A typical bank's assets consist of all forms of personal and commercial loans, mortgages, and securities. The liabilities are interest-bearing customer deposits. The excess revenue that is generated from the interest earned on assets over the interest paid out on deposits is the net interest income.

Net income is the amount earned after subtracting salaries, taxes and other deductions from gross income. For a business, net income is the amount of revenue left after subtracting all expenses, taxes and costs.

Answer (a): Salaries are expenses for any business and should be deducted from the revenue of the business. So, Net Income measure should pick up on high salaries.

Answer (b): Fee income is the charges imposed by the financial institutuions and the amount is treated as income. So, Net Income measure should pick up on high fee income.

Answer (c): Deposit interest is the amount paid by the bank on the deposits made by its customers. Net interest income measure is the better picks up on high deposit interest.

Answer (d): Banks generate the revenue in the form of interest on loans from its customers and pay interest on deposits to its customers. Net interest income measure better picks up on the efficiency of the bank's core business operations.