Canadian banks can pay relatively low interest rates on savings accounts because they use the money deposited by savers to lend to borrowers at higher interest rates. Banks make money by earning a spread between the interest rate they charge borrowers and the interest rate they pay on deposits.
On the other hand, banks charge higher interest rates on loans because they are taking on risk by lending money to borrowers. They need to cover their own costs and generate profits by charging interest rates that are higher than their own borrowing costs.
Additionally, the interest rates charged on loans are typically higher than the interest rates paid on savings accounts because loans are usually for longer periods of time and involve more risk. There is also the cost of administration and the infrastructure involved in processing and servicing loans that banks need to cover.
Banks make money by borrowing funds at low rates and lending them out at higher rates. The interest rates they charge on loans reflect the risk and costs involved in lending, while the interest rates paid on savings reflect the returns that can be earned on relatively low-risk investments.
The difference between the interest paid out and the interest collected by an average bank is known as net interest income. Net interest income is a key source of revenue for banks.
The amount of interest paid out by a bank depends on the interest rates it offers to depositors on savings accounts, certificates of deposit, and other types of deposits. The interest rates paid out by banks are influenced by market conditions, competition, and the bank's own funding costs.
The amount of interest collected by a bank depends on the interest rates it charges on loans and other forms of credit. The interest rates charged by banks on loans are influenced by a variety of factors, including the riskiness of the borrower, market conditions, and the bank's own cost of funds.
The net interest income of a bank is the difference between the interest paid out on deposits and the interest collected on loans and other forms of credit. The net interest income is affected by the spread between the interest rates paid out and the interest rates collected, as well as the volume of deposits and loans.
It's worth noting that net interest income is just one source of revenue for banks, and banks generate revenue from a variety of other sources, such as fees and commissions, trading income, and investment income.
Source: Some or all of the content was generated using an AI language model
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