Net Interest Margin

Think of a bank like a set of money lungs. Money comes in. Money goes out. The bank borrows money from various sources (like depositors, for instance...that's why you get that fraction of one percent interest each month). Then it lends that money out, for things like home mortgages and boat loans, hopefully at a higher interest rate than it pays for the borrowed funds.

The difference between the interest rates of these two sides of the equation provides the net interest margin. The bank borrows money at one rate, then lends it out at another rate. The net interest margin measures the spread between the two.

The "net" part comes in because the figure takes into account interest-generating assets the bank might own. So if the bank holds a set of Treasury bonds, or some euro-denomincated convertible stock, the interest on those instruments gets applied to the net interest margin figure.

While the concept is relatively simple, the math can get complicated in calculating net interest margin. The bank has a lot of loans out, with varying interest rates, and it has borrowed money from many different sources, each loan carrying a different individual rates. Meanwhile, it likely holds many different types of interest-generating assets, which need to get included in the calculation.

A typical net interest margin for a bank will hover around the 3% range.