Believe it or not, the way you bank can make an impact.
What is a bank spread?
Bank spread is the difference between the interest rate that a bank charges a borrower and the interest rate a bank pays a depositor. Also called the net interest spread, the bank spread is a percentage that tells someone how much money the bank earns versus how much it gives out.
A bank earns money from interest it receives on loans and other assets, and it pays out money to customers who make deposits into interest-bearing accounts. The ratio of money it receives to money it pays out is called the bank spread.
The bank spread can indicate a bank’s profit margin. A high spread equates to a higher profit margin, since the difference between interest earned and interest paid out is high.
However, bank spread measures the average difference between lending and borrowing interest rates, not the amount of banking activity itself, which means that bank spread doesn’t necessarily indicate a financial institution’s profitability.
If you invest money in a certificate of deposit (CD), you can start earning interest for yourself.
Bank spread example
Consider a bank that lends money to customers at an average rate of 8 percent. At the same time, the interest rate the bank pays on funds that customers deposit into their personal accounts is 1 percent. The net interest spread of that financial institution would be 8 percent minus 1 percent, resulting in a bank spread of 7 percent.