let's develop on this simple bank example

assume a brand-new bank with an empty balance sheet, no revenue, no deposits, no cashflow and no regulations

the bank is about to finance its first asset - a UST bond with a liability - bonds issued by the bank

Illya Gerasymchuk 2025-08-13 00:02

this newly acquired UST bond was financed with some liability of the bank

let's say the bank itself issued bonds with a smaller coupon than UST’s

thus, the bank used a liability to finance and asset and earns a spread