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What is the spread that a bank earns on funds it has borrowed?
AThe fee it charges a customer for opening an account
BThe gap between its deposits and its total lending
CThe share of its deposits it must hold in reserve
DThe gap between the rate it charges and the rate it pays
Answer & Solution
Correct answer: D. The gap between the rate it charges and the rate it pays
1. A bank borrows at one rate and lends the same money out at a higher one.
2. The spread is the difference between the rate it charges its customers and the rate it pays for the funds.
3. That difference, and not the gross interest received, is what the bank keeps.
4. Account fees add to income as well, but they are charges for services rather than the spread on borrowed funds.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 15 "Understanding Money and Financial Institutions", section 15.2 The Federal Reserve System_
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