--- title: "Net Interest Spread: definition, formula, and thresholds" description: "Net interest spread is the difference between the average yield a bank earns on its assets and the average rate it pays on its funding. It isolates pure pricing power, separate from the free-funding benefit captured by net interest margin." canonical_url: https://www.bankregreports.com/glossary/net-interest-spread/ source: BankRegReports category: "Profitability" units: "%" schedule: "Schedule RI" --- # Net Interest Spread > Net interest spread is the difference between the average yield a bank earns on its assets and the average rate it pays on its funding. It isolates pure pricing power, separate from the free-funding benefit captured by net interest margin. ## Formula ``` Net Interest Spread = Yield on Earning Assets - Cost of Interest-Bearing Liabilities ``` Both legs are computed from Schedule RI. The spread excludes the lift that noninterest-bearing deposits give to margin, so it is usually a touch lower than the net interest margin and reflects the rate gap alone. ## Why it matters The spread shows whether a bank's margin comes from genuine pricing power or from cheap, noninterest-bearing funding. Two banks can post the same net interest margin while one earns it through a wide spread and the other through a large free-deposit base. ## How to read it Read net interest spread next to net interest margin. When margin exceeds spread by a wide gap, the bank benefits heavily from noninterest-bearing deposits; a narrow gap means most of the margin is earned on rate alone, more exposed if asset yields fall. ## Thresholds | Range | Reading | What it means | |---|---|---| | ≥ 3.0% | Strong | Wide pricing spread independent of free funding. | | 2.0-3.0% | Adequate | Healthy spread for most commercial banks. | | 1.0-2.0% | Watch | Thin spread; margin leans on cheap deposits. | | < 1.0% | Concern | Minimal pricing power between assets and funding. | ## Worked example A bank earning 5.0% on assets and paying 2.2% on interest-bearing liabilities has a 2.8% net interest spread. If its net interest margin is 3.4%, the 60bp gap is the value of its noninterest-bearing checking base. ## Questions ### What is the difference between net interest spread and net interest margin? Spread is asset yield minus funding rate. Margin is net interest income divided by average earning assets, which also captures the benefit of funding provided by noninterest-bearing deposits and equity. So margin is usually slightly higher than spread. ### Why can two banks with the same margin have different spreads? A bank with abundant noninterest-bearing deposits earns part of its margin from free funding, so it can post a strong margin on a narrow spread. A bank without that base must earn the same margin through a wider rate spread. ## Sources - [FFIEC Call Report Schedule RI (Income Statement)](https://www.ffiec.gov/sites/default/files/data/reporting-forms/FFIEC031_FFIEC041_202606_i.pdf) (PDF) - [Uniform Bank Performance Report (UBPR)](https://www.ffiec.gov/data/ubpr) ## Related metrics - [Net Interest Margin](https://www.bankregreports.com/glossary/net-interest-margin/): Net interest margin (NIM) is a bank's interest income minus its interest expense, annualized and divided by its average earning assets, expressed as a percentage. It measures the spread a bank earns on its lending and investing, the core of how a bank makes money. - [Yield on Earning Assets](https://www.bankregreports.com/glossary/yield-earning-assets/): Yield on Earning Assets measures gross interest income as a percentage of average earning assets. It is the asset-side input to net interest margin, the bank's gross interest rate. - [Cost of Funds](https://www.bankregreports.com/glossary/cost-of-funds/): Cost of funds is the interest rate a bank pays, on average, for the money it lends and invests: annualized interest expense divided by average funding from deposits and borrowings. It is the bank's own cost of money and the expense side of net interest margin. - [Net Interest Income](https://www.bankregreports.com/glossary/net-interest-income/): Net interest income (NII) is the difference between the interest a bank earns on loans and securities and the interest it pays on deposits and borrowings. It is the core profit engine of traditional banking and the numerator behind net interest margin. ## About this document This is the markdown twin of the page named in `canonical_url` above. Source filings are public record; the cleaning, normalization, cross-source linkage, and derived metrics are BankRegReports' own. 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