The spread effect demonstrates that, regardless of the direction of a change in market interest rates, a positive relation exists between the changes in spread and changes in net interest income.

Question

Quizplus · Accepted Answer

The spread effect refers to the impact of changes in interest rates on net interest income, which is the difference between interest earned and interest paid. When interest rates increase, the spread between the interest earned on loans and the interest paid on deposits widens, leading to higher net interest income. When interest rates decrease, the spread narrows, leading to lower net interest income. Therefore, regardless of the direction of the change in market interest rates, a positive relationship exists between the changes in spread and changes in net interest income.

The Spread Effect Demonstrates That, Regardless of the Direction of a Change