New Banking System

Banking and Finance DLC for Capitalism Lab
Nazka231
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Re: New Banking System

Post by Nazka231 »

David wrote:1) Do you think that we should call it "Federal fund rate", which is the term coined by the US Federal Reserve or use a more generic name like "official bank rate" ?
We say most of the time Federal fund rate but it's in fact a target like counting said. For instance 0.00-0.25. I guess we say only Federal fund rate because it's faster to say...
In the EU the overnight rate evolves between 2 rates of facility that act like a target. These 2 rates are: the interest rate of the marginal lending facility, and the interest rate of the deposit facility. [1] This overnight rate -so the rate evolving between this 2 "boundaries"- is named Eonia for Euro OverNight Index Average. It represents more or less where is currently the market. More info can be found here [2].

[1] https://www.ecb.europa.eu/mopo/implemen ... ex.en.html Look also at "Data" and you can see that almost nobody uses the "marginal lending facility" because it is a last resort thing to use. Like in the US where it is named the Discount Window, getting money from the BCE (or Fed for the US) is the most expensive solution.

[2] http://thismatter.com/money/banking/eur ... policy.htm
torpedo_1
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Re: New Banking System

Post by torpedo_1 »

David wrote:In the current version, the loan rate is determined by the central bank. Since there is only one commercial bank, the commercial bank's interest rate is always the same as the loan rate set by the central bank.

For the new banking system, there will be multiple commercial banks.

Each bank can set its own loan interest rate, as described in this post:
http://www.capitalismlab.com/forum/view ... 497#p11663

In the new banking system, the central bank will set an official benchmark interest rate and individual banks can set their own interest rates based on it.

There are a couple issues to be discussed:
1) Do you think that we should call it "Federal fund rate", which is the term coined by the US Federal Reserve or use a more generic name like "official bank rate" ? (http://en.wikipedia.org/wiki/Bank_rate - different countries use different names for this.) Or any other name that you may suggest?

2) Do you think there should be a range limit for setting the loan interest rate at the individual commercial bank level? Like -2% to +2% of the central bank's official bank rate. Or there shouldn't be any limit and let the market dynamics work out on its own?

For 1, I think it should be called the "Central Bank Rate", because it the generic term with no particular link to a country.

For 2, I think soft rules should be set to control extreme lending rate:
To avoid too low loan interest rate, I think each bank's excessive "Balance with Central Bank" (i.e. Actual balance with Central Bank minus required cash reserved amount) should attract a lower interest, say "Central Bank Rate" - 3%. Then there will be no incentive to attract more loan by lowering the interest rate 3% below "Central Bank Rate".

To avoid excessive interest rate, loan/ money demand very sensitive to interest rate (nearly perfectly elastic in econ's term). Because a borrower will get the same money regardless of which bank he goes to, the only different is interest rate (perhaps plus a bit awareness reputation). Loan or money demand should generally fill the bank with lowest respective interest rate first, then the second. If loan/money demand greatly exceeds bank money supply, new bank would be set up by AI to take up the market gap.
Parkerrush92
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Re: New Banking System

Post by Parkerrush92 »

This whole thread should start with. "Lets start by isolating banks by country, adjusting interest rates based on country economic performance, set up private banks with varying interest rates and allow companies to have multiple lines of credit. Allow me to elaborate.

In each country, (or even city) there should be a central bank, with an interest rate dependent of economic factors. Then, within the same city or country, there should be private banks (with a higher interest rate.) After reaching a set credit limit (which I believe should be lower for the central bank, *because central banks limit loans to private businesses AND because the private banks, should borrow from the central bank at the lower interest rate*) Companies should go to the private banks for loans.

Companies should only be able to borrow from the central bank of their country of origin (*should be added to my new taxes thread*) AND should be able to shop private bank interest rates, which of course would be subject to the interest rate of their country of origin.)
RogerClemons
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Re: New Banking System

Post by RogerClemons »

With new methods proposed, it is really possible to reach at least some financial stability: http://livecustomwriting.com/blog/usefu ... -stability. How exactly does it work if the consumers deposit or borrow money from a bank?
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eleaza
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Re: New Banking System

Post by eleaza »

I know this is a spam reply resurrected old post, but after reading through most of them, I feel this proposal sounds pretty fun. Why was it left out in CES DLC? Private banks, even insurance, or trust funds should be very interesting to play with.
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TheDukeOfRockford
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Re: New Banking System

Post by TheDukeOfRockford »

I think these are good ideas you got going here. I would lend my support for having banking and corporate bonds. I think we need more options for borrowing money. I was interested in idea of corporate bonds.

Forgive me for being a novice as I am still learning but are corporate bonds and bank loans the only two possible options for corporations to borrow money? Or is there others, too?
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eleaza
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Re: New Banking System

Post by eleaza »

TheDukeOfRockford wrote:I think these are good ideas you got going here. I would lend my support for having banking and corporate bonds. I think we need more options for borrowing money. I was interested in idea of corporate bonds.

Forgive me for being a novice as I am still learning but are corporate bonds and bank loans the only two possible options for corporations to borrow money? Or is there others, too?
Currently in core game and subsidiary DLC, there's only one "central bank" to borrow money for corporations.

With CES DLC, corporations can still only borrow from the "central bank". But local city government can issue bonds with fixed mature date to "raise" money for city fund, however city government can not borrow money from "central bank.

There's no corporate bond yet.
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TheDukeOfRockford
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Re: New Banking System

Post by TheDukeOfRockford »

eleaza wrote:
TheDukeOfRockford wrote:I think these are good ideas you got going here. I would lend my support for having banking and corporate bonds. I think we need more options for borrowing money. I was interested in idea of corporate bonds.

Forgive me for being a novice as I am still learning but are corporate bonds and bank loans the only two possible options for corporations to borrow money? Or is there others, too?
Currently in core game and subsidiary DLC, there's only one "central bank" to borrow money for corporations.

With CES DLC, corporations can still only borrow from the "central bank". But local city government can issue bonds with fixed mature date to "raise" money for city fund, however city government can not borrow money from "central bank.

There's no corporate bond yet.
Sorry, I should clarify for last paragraph... I meant to ask if bonds and bank loans are the only two borrowing options for corporations in REAL life. :P
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eleaza
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Re: New Banking System

Post by eleaza »

TheDukeOfRockford wrote:
eleaza wrote:
TheDukeOfRockford wrote:I think these are good ideas you got going here. I would lend my support for having banking and corporate bonds. I think we need more options for borrowing money. I was interested in idea of corporate bonds.

Forgive me for being a novice as I am still learning but are corporate bonds and bank loans the only two possible options for corporations to borrow money? Or is there others, too?
Currently in core game and subsidiary DLC, there's only one "central bank" to borrow money for corporations.

With CES DLC, corporations can still only borrow from the "central bank". But local city government can issue bonds with fixed mature date to "raise" money for city fund, however city government can not borrow money from "central bank.

There's no corporate bond yet.
Sorry, I should clarify for last paragraph... I meant to ask if bonds and bank loans are the only two borrowing options for corporations in REAL life. :P
Of course not. There are lending from shareholders, etc. And depend on what's your definition of raising capital for a company, it could include issuing new stocks for capital, or other derivatives. As of what kind of borrowing, usually we can define them in different categories like from individuals or institutions, ,regulated or nonregulated, directly or through intermediaries, etc.
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TheDukeOfRockford
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Re: New Banking System

Post by TheDukeOfRockford »

eleaza wrote:
TheDukeOfRockford wrote: Sorry, I should clarify for last paragraph... I meant to ask if bonds and bank loans are the only two borrowing options for corporations in REAL life. :P
Of course not. There are lending from shareholders, etc. And depend on what's your definition of raising capital for a company, it could include issuing new stocks for capital, or other derivatives. As of what kind of borrowing, usually we can define them in different categories like from individuals or institutions, ,regulated or nonregulated, directly or through intermediaries, etc.
Lending from shareholders? Interesting...

I knew there are two common types of capital which is equity capital and debt capital. Stocks would be former while corporate bonds would be latter, as is bank loans, I think.

According to Wikipedia entry on corporate finance, notes payable, also called promissory notes, is also considered debt capital but I don't think it is worth implementing since the article on this particular financial instrument seem to suggest it is really just different from loans in terms of detailed agreements and etc.

Corporate bonds themselves are subdivided into categories like coupons and such but I don't think we would want to over-complicate it in game.

I'm not sure what else to further add to the loan mechanic, I think it is fine as it is, other than having banking become a possible business to enter into which I support. Ideally, a corporation could shop around to get a loan in a best possible deal from a bank. No doubt that would in turn spur the banks to compete, etc.
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