SimBank Bank Financial Management Simulation

1. SimBankBank Financial Management Simulation Fernando E. Arellano, Ph.D. University of Dallas Richard D. Johnson, Ph.D. Colorado State University

2. ¿What is SimBank? • SimBank is a software program that simulates commercial bank operations. • Simulated operations pertain to the financial management of a commercial bank. • Up to twelve quarters can be simulated. • Up to fifteen banks or teams can participate in up to twelve quarters of the financial management of a commercial bank?

3. Operations Simulated • Making loans • Receiving deposits • Making and receiving inter-bank loans • Receiving loans from the FRB • Issuing and redeeming subordinated debt • Buying and selling Treasury securities • Distributing dividends • Issuing and repurchasing stock • Selling mortgage loans

4. Main Operations • Making loans • Commercial (two types) • Mortgage • Consumer • Agricultural • Receiving deposits • Demand deposit accounts • Interest bearing transactions • Savings accounts • 6-month and 2-year CDs

5. Funding Sources • Long term: • Issuance of stock • Subordinated debt (capital notes) • Sale of mortgage loans • Long-term deposits (2-year CDs) • Short term • Deposits (demand deposits, interest bearing transactions, savings, and 6-month CDs) • Inter-bank loans • Loans from the FRB

6. Investment Options • The bank can invest in: • Treasury securities • 3-month Treasury bills • 1-year Treasury notes • 5-year Treasury notes • 10-year Treasury bonds • Excess liquidity (Fed Funds) can also be used to make inter-bank loans.

7. Characteristics of the Initial Bank • Banks develop their operations in an economic environment set by the instructor or by default. • At the beginning of the simulation all banks have the same: • Size, profitability and capital structure. • Loan portfolio • Interest rates • Deposit structure • Expenditures in promotion • Average salary • Number of branches

8. Economic Environment • Loan and deposit volumes respond to interest rates variations and expenditures in promotion. • They also respond to general conditions in the economic environment (GDP, inflation, interest rates) and to a particular economic sector (housing, agricultural, consumer). • Additionally, in the case of commercial loans, they respond to levels of compensating balances.

9. Economic Environment • They also respond to fees charged in demand deposits (DDA) and interest bearing transaction (IBT) accounts. • Finally, loan and deposit volumes for a bank are a function of average salaries and the number of branches.

10. Economic Environment • There are transaction costs for: • Making and receiving inter-bank loans with Fed Funds • Selling Treasury securities • Issuing and redeeming subordinated debt (capital notes) • Issuing stock

11. Regulatory Environment • Each bank has to comply with a required level of reserves. • There is a minimum capital requirement. • In case any of the above requirements are not met, banks are subject to monetary penalties. • There is a minimum average salary for all banks. • There is a maximum number of branches that a bank can open in any given quarter.

12. Bank Interaction • The banks in the simulation compete for loans and deposits. • Competition is carried on through the setting of interest rates for loans and deposits. • Additionally, banks can set compensating balances in commercial loans. • Banks can also charge service fees on demand deposits and interest bearing transaction accounts.

13. Bank Interaction • Each type of loan and deposit has an interest rate elasticity on which allocation of volumes to banks are determined. • Allocation of loans and deposits is also determined based on: • Expenditures in promotion by type of loan and deposits • Average salary • Number of branches

14. Bank Decisions in SimBank • Participants make decisions pertaining to: • Interest rates for loans and deposits • Promotional expenditures by type of loan and deposits • Compensating balances in commercial loans • Service fees in demand deposit and interest bearing transaction accounts • Average salary • Number of new branches

15. Bank Decisions in SimBank • Participants make decisions pertaining: (cont.) • Inter-bank loans • Borrowing from the FRB • Issuance and repurchase of stock • Issuance and redemption of capital notes • Distribution of dividends

16. Bank Decisions in SimBank • Decisions on interest rates and promotion in prior quarters impact current quarter allocations. • Funding is determined by short and long term bank decisions. • If funding is insufficient, the bank will receive an unplanned loan from FRB at a high interest rate.

17. Loan and Deposit Allocation Criteria • The volume of each type of loan available for all the banks in the simulation is impacted by: • In Commercial Loans • Industrial Production index • GDP • In Mortgage Loans • Number of new house permits • GDP growth • In Agricultural Loans • Agricultural production index • In Consumer Loans • GDP

18. Loan and Deposit Allocation Criteria • The volume of each type of deposit available to all banks in the simulation is impacted by the behavior of GDP and the average interest rate in each type of deposit

19. Loan and Deposit Allocation Criteria • Loan deposits are allocated to each bank based on the following criteria: • Interest rates • Promotional expenditures (by type of loan and deposit) and total expenditures • In commercial loans, compensating balances • In DDA and IBT, service fees • Average salary • Number of branches

20. Loan and Deposit Allocation Criteria • Total loan and deposit volumes are also a function of the economic environment. • Some loans volumes are a function of the growth in a particular sector.

21. Evaluation Criteria • After each quarter each bank receive points based on: • Stock price • ROE • Debt ratio • Liquidity ratio • Loan losses • Interest rate risk