# Interest rate spread

**Question ID:**2020/0005**Date of publication**:**31/01/2020****Subject matter:**Loans price and other conditions**AnaCredit Manual:**Part II**Data attribute:**Interest rate spread / margin

# Question

Please clarify whether the data attribute “interest rate spread/margin” should be reported with reference to a nominal or effective interest rate. More specifically, the data attribute is defined on page 48 of Part II of the Reporting Manual as the “margin/spread added to the reference rate to account for the applied interest rate”. Here, the question is whether “the applied interest rate” refers to the data attribute interest rate as defined in the MIR regulation^{[1]} or to the interest rate as specified in the contract.

# Answer

Under AnaCredit, the interest rate spread is the value added to the reference rate to account for the contractually agreed interest rate.

For example, banks often use the EURIBOR interest rates as the reference rate when setting interest rates on loans. Hence in a number of European countries there are loans for which the interest rate consists of a euro interbank offered rate with a supplement in the form of a spread/margin.

The interest rate spread applies to interest rates charged for variable or mixed interest loans (cf. Section 3.4.12 in Part II of the AnaCredit Reporting Manual and Q&A 2017/0011, which deals specifically with the spread/margin for fixed interest rate instruments).

In the case of variable or mixed interest instruments, the contractual interest rate is typically obtained as the sum of the reference rate and the interest rate margin.

However, in order to be able to add the spread to the reference date, it is necessary for both of these to be quoted in a consistent manner. For example, the EURIBOR interest rates (cf. the AnaCredit data attribute “Reference rate”), each with a different maturity ranging from 1 week to 12 months, are quoted as nominal rates per annum. It is therefore necessary that the margin corresponds conceptually to the type of reference rate reported under the data attribute “reference rate”’.

For example, if a 10-year loan is granted, where it is agreed that for the first 12 months the interest is fixed at 5% and then it is automatically adjusted to EURIBOR-12 months plus 250 basis points, the margin to report is thus 250 basis points (expressed as a numerical value representing a proportion per hundred – see Interest rate percent as numerical values) and the interest rate that is taken into account in the calculation of the annualised agreed rate or NDER is 5%+2.5%=7.5%.

Notably, contractually agreed interest rates are taken into account in the calculation of the annualised agreed rate (AAR) or the narrowly defined rate (NDER), which is required under the data attribute “interest rate”, although they need not coincide. This is because the AAR and the NDER take into account the frequency of interest payments, while contractually agreed interest rates are nominal values (typically quoted in percentages per annum). All other things being equal, the more frequent the interest payments, the higher the interest rate recorded in the data attribute “interest rate”.

To conclude, the interest rate spread is reported to AnaCredit according to the following considerations:

- the interest rate spread/margin only applies to cases in which the interest rate type is not “fixed”;
- the spread/margin is related in a meaningful manner to the nominal benchmark as reported in the reference rate;
- with the exception of “other single reference rates” and “other multiple reference rates”, which are in general undefined, the other reference rate values admissible under AnaCredit are quoted as nominal rates per annum without taking into account the frequency of interest payments;
- accordingly, the interest rate spread is quoted in percentages per annum regardless of the interest payment frequency;
- the sum of the reference rate and the interest rate spread/margin is the contractually agreed interest rate, which is typically quoted as nominal rates per annum;
- for the purpose of reporting the interest rate under AnaCredit, contractually agreed interest rates are suitably converted to an annual basis taking into account the frequency of the interest payments, and are quoted in percentages per annum.

Note also that an alternative approach, whereby the respective reference rate is simply deducted from the data attribute “interest rate” to arrive at a value for the data attribute “interest rate spread”, leads to a methodological inconsistency and should be avoided.

# Related questions

^{[1]}Regulation (EU) No 1072/2013 of the European Central Bank of 24 September 2013 concerning statistics on interest rates applied by monetary financial institutions (ECB/2013/34) (OJ L 297/51).