Bank-land, a fey world that doesn't add up
The Australian Bankers' Association will not hear a word of it. Narnia - with all its naiads and dryads, unicorns, centaurs and beavers that talk - truly exists.
We know this because the banks have their own parallel universe too, the world beyond the Reserve Bank wardrobe, a world with astonishing similarities to Narnia.
Those familiar with the classic children's fantasy The Lion, the Witch and the Wardrobe know that it is always wintertime in Narnia. In ABA-land, dear readers, it is always wintertime too.
This is a land frozen in time, you see. Just as 1000 years in Narnia is but a few seconds in the real world, the four years which have elapsed since the global financial crisis are but a fraction of a second in ABA-land.
This explains why we, here in what is commonly deemed to be the real world, believe that market volatility and wholesale funding costs have subsided since the GFC, while the good citizens of ABA-land are still waking up to the fall of Lehman Brothers.
It is no wonder things are so tough. As foretold by the bards of big banking, this is a perpetual winterland across whose bleak and icy climes our Big Four kings and queens - Ian, Gail, Cam and Mikey - traverse, warring with the Wicked Witch of Wholesale Funding Costs while the chill winds of competition howl all about them.
Yes, their profits have climbed to record highs year after year, even though loan growth has been listless, and even though their own costs of operation have risen. Yet the price at which they raise their money remains, they insist, onerous.
If all this is not incontrovertible evidence of a parallel world, surely ANZ chief Mike Smith did not take home $17 million last year.
Can you not feel the magic now? Close your eyes and conjure up a company whose revenue growth has slowed - and whose operating costs have risen - but whose profits have somehow managed to soar majestically like a winged horse above the distant ice-capped mountains.
Truly, this is the Magic of the Margins.
Lest your correspondent be accused of prejudice, and we have been under assault from the ABA this week, we will publish online on Monday the dialogue between ABA chief executive Steven Munchenberg and former central banker and Canberra University professor of banking and finance Milind Sathye. In a news story on Monday, the professor argued that the three main sources of bank funding - deposits, and long-term and short-term wholesale funding - had all fallen in cost. Bank margins had risen, he said.
The ABA contends that the professor is wrong. So those with a predilection for funding costs can check out the debate online. For those less fascinated by spread compression in senior paper issuance relative to Libor-OIS benchmarks, we shall distil. In short, it is magic.
You see, we cannot know the provenance of these runic disclosures trumpeted as proof of high funding costs - whether or not they arise from communication with Mr and Mrs Beaver or Mr Tumnus the faun.
We only know that they are secret numbers hailing from beyond the RBA wardrobe, numbers to which only the bankers are privy.
The other affinity between these two worlds beyond the wardrobe is that, just as Santa Claus really exists in Narnia, Santa is also very much alive in ABA-land.
And the Santa of the bankers is every bit as bounteous for Ian, Gail, Cam and Mikey as the Narnian Santa is to Peter, Susan, Edmund and Lucy.
The difference is that the Santa of ABA-land is in fact Swanta. Yes, he is none other than Swanta Claus, more commonly known as Treasurer Wayne Swan, but known to the bankers as the curmudgeonly though affectionate old Swanta.
Swanta, you see, has merrily bestowed on his enchanted children not merely a sovereign funding guarantee - at better rates than the second-tier banking children enjoy - but also an evergreen deposits guarantee and, as unveiled this week, access to $380 billion of taxpayers' money at 40 basis points above the cash rate.
This is the piece de resistance, the clincher, Swanta's consummate gift just in case anything ever, ever goes wrong.
But all this fuss is only getting in the way of a damn fine yarn. As Albert Einstein said, "imagination is more important than knowledge". It is in this that we, and the banks, stand united, locked arm-in-arm on common ground.
Frequently Asked Questions about this Article…
The article suggests a disconnect: banks report record profits year after year despite listless loan growth and rising operating costs, yet they insist their wholesale funding costs are onerous. The piece portrays this as a kind of banking “magic” — margin expansion that doesn’t square with the public narrative about expensive funding.
According to the article, Professor Milind Sathye argued that the three main sources of bank funding — deposits, long‑term wholesale funding and short‑term wholesale funding — have fallen in cost, and that bank margins have risen. The article notes this view sparked debate with the Australian Bankers’ Association.
The article states the ABA disputes Professor Sathye’s claim and will be part of a published dialogue with him. In short, the ABA contends the professor is wrong about the direction of funding costs, so readers are pointed to the public debate for more detail.
The article describes Treasurer Wayne Swan’s support for major banks: a sovereign funding guarantee (on better rates than second‑tier banks), an ongoing deposits guarantee, and access to about $380 billion of taxpayer money at 40 basis points above the cash rate.
The article references the ‘Big Four’ bank leaders by first name (Ian, Gail, Cam and Mikey) and calls out ANZ chief Mike Smith, noting he reportedly took home $17 million last year. The point is to highlight large executive rewards amid debates about funding costs and high profits.
In the article, “Magic of the Margins” refers to banks delivering soaring profits despite slower revenue growth and higher operating costs — essentially margin expansion that appears to drive profitability even when other indicators are weak. For investors, it’s a reminder to look beyond headline profits and examine margins, cost drivers and funding disclosures.
The article suggests some funding‑cost figures are opaque — described as ‘secret numbers’ known mainly to bankers and beyond the RBA ‘wardrobe.’ Everyday investors should therefore watch official disclosures, public debates (for example between the ABA and independent experts), and government guarantees that affect bank funding dynamics.
The article’s tone is skeptical: while banks report record profits, claims that funding costs remain high are contested. Investors should be cautious, follow the public debate (including views from the ABA and academics like Milind Sathye), factor in government support such as the sovereign funding and deposit guarantees, and scrutinise margins and funding sources rather than relying solely on profit headlines.
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