Spread Concept
The term Spread designates the difference between the selling and the purchasing prices of a certain asset or financial instrument. The term spread is also used to designate increase (in percentage) to the indexed, that the banks demand when they give a funding with variable rate (the designated active interest rate). For example, in the loans in Portugal, the indexed generally used is the Euribor (rate calculated from the interest rates practiced in the interbank market), so the spread designates the difference between the interest rate charged by the bank and the Euribor rate for the same time.
It’s frequent to nickname the spread as the profit of the financial institution which is not true. As it’s easy to understand, the profit if the financial institution is the difference between the active interest rate and the passive interest rate (interest rate paid for its own funding) and this last isn’t necessarily like the Euribor. In fact, banks resort to numerous funding sources beyond the interbank market like for example the capture of deposits or the issuing of bonds, which can have the interest rate a lot different from Euribor. On the other hand, even if all the funding was performed in the interbank market, the interest rate paid could also be a lot different from the Euribor to the extent that this last is the result of an average on rates applied on a European level and not necessarily the rate achieved by a certain bank.
