Welcome to Ask Fear and Greed, where we take your questions and do our very very best to answer them. I'm Michael Thompson, and good afternoon, Sean Aylmer.
Good afternoon, Michael, Sean.
Today's question comes from Joshua. I feel like we're on kind of josh terms h Joshua because he has sent us a question via the website, via Fearangreed dot com dot au. You can do it via LinkedIn or Facebook or Instagram anywhere, really, but he's gone via the website and it feels like it's right up your ali, Sean. Because you're a bank guy, you have you've covered banks for a long time. So Joshua has asked Josh Sorry, Josh, josh has asked. Simple question might have a simple answer. Where do banks get their money from when you get a loan? Where do they get the cash from? I'm assuming it's not just sitting in their account waiting for your loan to be approved. Simple question doesn't have a simple answer.
Shot it probably does, but you've asked me, so I'm sure that I can complicate it.
I'm sure you have a rare gift for complicating No, you have a gift for simplifying and also for adding contextud right, So how's that for pressure.
That's good. There are three places that a bank gets its money from. The first place, the best place, as far as the bank is concerned, are people that deposit funds. So we might have a deposit account, or a business might have a deposit account with a bank. It's called Westpac or Commonwealth and EDNA, whichever. We put the money in there, we get paid interest of one percent. Let's say, so the bank is holding so say I've got a deposit account of one thousand dollars, thanksgiving me one percent on that. It's ten dollars at the end of the year, but it's got that thousand dollars to lend out to Josh or to whoever they want. So about two thirds of the money they get or they lend they hold is from deposits. The great thing about that, it's really cheap money for the banks. And when the big banks seem to be giving you better deals on loans, it's because their cost of funding these deposits are lower than most other manner of getting money. So that's the main one. Deposits is number one. The second one is they can a bank can issue a bond or a debt security in financial market, so it can go and say to a super fund who's got tens of billions of dollars, this is an IOU, it's a bond, it's an IOU. We'll pay you back over ten years and will pay you four percent. Can you please give me the ten billion dollars? And the super funds have it because we're putting our money into our super fund every pay So they've got stacks of cash that they're always looking at ways to invest, and a bank will borrow the money. Effectively you and IAU as a bond from the superfund. Let's say that's one hundred million dollars. They might lend it out then at a higher rate than what they're paying the superfund, so they're still making a profit on it, but not as much profit as on the deposit rate. So they're first two ways deposits the financial markets. So let's say bonds. The third way is equity, just you know, bank shares the list on the share market. The rest of their funding is just the money that they get from the equity. So there's three ways equity, securities, debt securities, bonds, stuff like that, but the big one is deposits.
Okay, So that explains then, because we have talked recently about the fact that the banks are really kind of pushing hard now to lure customers to their banks with their deposits, just to try and get more people to put their savings and various other things into banks, because really, the more successful they can be at that at building up these huge kind of stores of customer deposits, the more access they have to really, really really cheat.
Money exactly right, That's why they love deposits.
There you go. You know that it was a good question from Gergon question and I'd say it pretty simple. That's got to be up there as one of your more simple answers. Was that right? It was about three and a half minutes. I mean, I've seen we didn't mention an answer out to eight minutes before.
We didn't even talk about net interest margins. So in the show we often talk about net interest margins. Look at your face, You're like, oh my god.
Here, No, No, it was only because I'm like, we've done this in record time today, and then all of a sudden you're like, actually, one more thing more, don't stand up, just yet, Michael, I want to talk about net interest margins.
So we've got profit reporting season. Common off bank will report is half a year profit in a few weeks time. The other three big banks are on a different cycle so they won't. But all the analysts look at something they call net interest margin. That is simply the difference between what a bank pays depositors and thieves on loans, and the higher that is, the more profitable the bank. Full stop period.
Hang on, that's it.
That's it. I'm not saying anymore.
Ah, you know what We're going to call that doing an alma, delivering a really succinct, like it answer, and then just adding on a bit more extra to the end, additional context, extending it by a minute, two minutes, and all of a sudden it blows out. Look. Thank you very much, Joshua for the question. Josh I hope we've done a good job in answering it. Thank you very much, Sean for explaining it in such simple terms.
Thanks Michael, Thank you, Joshua.
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