Interest Rate Spread

The spread is a basic measure of how much a bank earns from its lending activity. If a bank charges an average of 6% on loans and pays an average of 2.5% on deposits, its interest rate spread is 3.5 percentage points.

The spread must cover the bank's operating costs, such as staff, branches and technology, the cost of loans that are not repaid and the bank's profit.

The interest rate spread is similar to, but not the same as, the net interest margin. The spread compares two average rates. The net interest margin compares net interest income with interest-earning assets, so it also reflects how much of the bank's funding comes from sources that pay little or no interest, such as current accounts and equity.

Spreads vary by country and by type of lending. Credit cards and unsecured loans have wide spreads because they are riskier. Mortgages usually have narrower spreads. Changes in competition, central bank rates and economic conditions all affect spreads.