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Speaker 1: Welcome to Ask Fear and Greed, where we take your

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Speaker 1: questions and do our very very best to answer them.

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Speaker 1: I'm Michael Thompson, and good afternoon, Sean Aylmer.

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Speaker 2: Good afternoon, Michael, Sean.

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Speaker 1: Today's question comes from Joshua. I feel like we're on

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Speaker 1: kind of josh terms h Joshua because he has sent

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Speaker 1: us a question via the website, via Fearangreed dot com

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Speaker 1: dot au. You can do it via LinkedIn or Facebook

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Speaker 1: or Instagram anywhere, really, but he's gone via the website

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Speaker 1: and it feels like it's right up your ali, Sean.

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Speaker 1: Because you're a bank guy, you have you've covered banks

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Speaker 1: for a long time. So Joshua has asked Josh Sorry, Josh,

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Speaker 1: josh has asked. Simple question might have a simple answer.

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Speaker 1: Where do banks get their money from when you get

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Speaker 1: a loan? Where do they get the cash from? I'm

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Speaker 1: assuming it's not just sitting in their account waiting for

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Speaker 1: your loan to be approved. Simple question doesn't have a

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Speaker 1: simple answer.

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Speaker 2: Shot it probably does, but you've asked me, so I'm

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Speaker 2: sure that I can complicate it.

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Speaker 1: I'm sure you have a rare gift for complicating No,

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Speaker 1: you have a gift for simplifying and also for adding

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Speaker 1: contextud right, So how's that for pressure.

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Speaker 2: That's good. There are three places that a bank gets

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Speaker 2: its money from. The first place, the best place, as

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Speaker 2: far as the bank is concerned, are people that deposit funds.

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Speaker 2: So we might have a deposit account, or a business

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Speaker 2: might have a deposit account with a bank. It's called

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Speaker 2: Westpac or Commonwealth and EDNA, whichever. We put the money

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Speaker 2: in there, we get paid interest of one percent. Let's say,

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Speaker 2: so the bank is holding so say I've got a

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Speaker 2: deposit account of one thousand dollars, thanksgiving me one percent

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Speaker 2: on that. It's ten dollars at the end of the year,

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Speaker 2: but it's got that thousand dollars to lend out to

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Speaker 2: Josh or to whoever they want. So about two thirds

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Speaker 2: of the money they get or they lend they hold

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Speaker 2: is from deposits. The great thing about that, it's really

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Speaker 2: cheap money for the banks. And when the big banks

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Speaker 2: seem to be giving you better deals on loans, it's

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Speaker 2: because their cost of funding these deposits are lower than

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Speaker 2: most other manner of getting money. So that's the main one.

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Speaker 2: Deposits is number one. The second one is they can

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Speaker 2: a bank can issue a bond or a debt security

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Speaker 2: in financial market, so it can go and say to

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Speaker 2: a super fund who's got tens of billions of dollars,

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Speaker 2: this is an IOU, it's a bond, it's an IOU.

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Speaker 2: We'll pay you back over ten years and will pay

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Speaker 2: you four percent. Can you please give me the ten

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Speaker 2: billion dollars? And the super funds have it because we're

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Speaker 2: putting our money into our super fund every pay So

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Speaker 2: they've got stacks of cash that they're always looking at

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Speaker 2: ways to invest, and a bank will borrow the money.

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Speaker 2: Effectively you and IAU as a bond from the superfund.

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Speaker 2: Let's say that's one hundred million dollars. They might lend

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Speaker 2: it out then at a higher rate than what they're

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Speaker 2: paying the superfund, so they're still making a profit on it,

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Speaker 2: but not as much profit as on the deposit rate.

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Speaker 2: So they're first two ways deposits the financial markets. So

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Speaker 2: let's say bonds. The third way is equity, just you know,

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Speaker 2: bank shares the list on the share market. The rest

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Speaker 2: of their funding is just the money that they get

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Speaker 2: from the equity. So there's three ways equity, securities, debt securities, bonds,

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Speaker 2: stuff like that, but the big one is deposits.

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Speaker 1: Okay, So that explains then, because we have talked recently

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Speaker 1: about the fact that the banks are really kind of

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Speaker 1: pushing hard now to lure customers to their banks with

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Speaker 1: their deposits, just to try and get more people to

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Speaker 1: put their savings and various other things into banks, because really,

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Speaker 1: the more successful they can be at that at building

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Speaker 1: up these huge kind of stores of customer deposits, the

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Speaker 1: more access they have to really, really really cheat.

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Speaker 2: Money exactly right, That's why they love deposits.

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Speaker 1: There you go. You know that it was a good

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Speaker 1: question from Gergon question and I'd say it pretty simple.

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Speaker 1: That's got to be up there as one of your

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Speaker 1: more simple answers. Was that right? It was about three

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Speaker 1: and a half minutes. I mean, I've seen we didn't

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Speaker 1: mention an answer out to eight minutes before.

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Speaker 2: We didn't even talk about net interest margins. So in

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Speaker 2: the show we often talk about net interest margins. Look

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Speaker 2: at your face, You're like, oh my god.

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Speaker 1: Here, No, No, it was only because I'm like, we've

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Speaker 1: done this in record time today, and then all of

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Speaker 1: a sudden you're like, actually, one more thing more, don't

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Speaker 1: stand up, just yet, Michael, I want to talk about

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Speaker 1: net interest margins.

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Speaker 2: So we've got profit reporting season. Common off bank will

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Speaker 2: report is half a year profit in a few weeks time.

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Speaker 2: The other three big banks are on a different cycle

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Speaker 2: so they won't. But all the analysts look at something

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Speaker 2: they call net interest margin. That is simply the difference

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Speaker 2: between what a bank pays depositors and thieves on loans,

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Speaker 2: and the higher that is, the more profitable the bank.

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Speaker 2: Full stop period.

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Speaker 1: Hang on, that's it.

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Speaker 2: That's it. I'm not saying anymore.

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Speaker 1: Ah, you know what We're going to call that doing

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Speaker 1: an alma, delivering a really succinct, like it answer, and

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Speaker 1: then just adding on a bit more extra to the end,

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Speaker 1: additional context, extending it by a minute, two minutes, and

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Speaker 1: all of a sudden it blows out. Look. Thank you

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Speaker 1: very much, Joshua for the question. Josh I hope we've

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Speaker 1: done a good job in answering it. Thank you very much,

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Speaker 1: Sean for explaining it in such simple terms.

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Speaker 2: Thanks Michael, Thank you, Joshua.

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Speaker 1: If you have a question that you would like to ask,

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Speaker 1: then you can send it on through Fear and Greed

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Speaker 1: dot com today you our website, send it vi our

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Speaker 1: email there or LinkedIn Instagram, Facebook, anyone of those platforms.

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Speaker 1: Your question will get to us. We will put it

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Speaker 1: on our list, and we will answer it as soon

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Speaker 1: as is humanly possible. I'm Michael Thompson and this is

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Speaker 1: ask Fear and Greed