Income & Expense
Total Interest Expense
Also known as Interest Expense
Total interest expense is everything a bank pays for its funding, interest on deposits and on borrowings. It is the cost side of the spread business and the line that surges fastest when rates rise.
How is Total Interest Expense calculated?
Schedule RI reports interest paid on each funding source. Dividing total interest expense by interest-bearing liabilities approximates the cost of funds; the gap between asset yield and funding cost is the net interest spread.
Why does Total Interest Expense matter?
Funding cost is where rate hikes bite first. Banks reliant on rate-sensitive deposits or wholesale borrowing see interest expense climb quickly, compressing margins, while those funded by sticky noninterest-bearing deposits are insulated.
How do you interpret Total Interest Expense?
Read interest expense with the cost of funds and the deposit mix. A low and slow-moving interest-expense line is the hallmark of a strong core-deposit franchise; a fast-rising one signals dependence on CDs, brokered deposits, or borrowings.
What do Total Interest Expense levels indicate?
| Range | Label | Interpretation |
|---|---|---|
| Low, slow to rise | Strong | Cheap, sticky funding base. |
| Moderate | Adequate | Funding costs in line with peers. |
| Rising quickly | Watch | Rate-sensitive funding repricing upward. |
| High / wholesale-heavy | Concern | Expensive funding squeezing the margin. |
Worked example
Frequently asked
What drives a bank's interest expense up?
Rising market rates, a deposit mix skewed toward CDs and money-market accounts, reliance on brokered deposits, and wholesale borrowing all push interest expense higher. A noninterest-bearing deposit base holds it down.
How does interest expense relate to cost of funds?
Cost of funds expresses interest expense as a percentage of interest-bearing liabilities (or total funding), making it comparable across banks of different sizes.
Sources
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