Banking Practice Exam

The term 'spread' in banking primarily refers to the difference between interest income and interest expense. This measure is crucial for banks as it indicates the profitability of their core lending operations. Interest income is generated from the loans and advances given to customers, while interest expense refers to the costs associated with deposits and other borrowed funds. The larger the spread, the more profitable a bank can be, as it signifies that the bank is earning significantly more from its loans than it is paying out in interest to depositors or other obligations.

While the other options include concepts that are important in banking, they do not accurately capture the specific definition of 'spread.' The difference between assets and liabilities pertains to a bank's balance sheet and its overall financial health but does not focus specifically on the interest operations. The margin earned on services offered looks at non-interest income and does not reflect the core interest-related functions of a bank. Lastly, the increase in cash reserves addresses liquidity and cash management rather than the interest rate dynamics that create the spread. Understanding the spread is fundamental for evaluating a bank's efficiency and profitability in its lending practices.