Feedback and suggestions for DLC Banking

[LT3001]

Hi guys,

Firstly, congratulations on a fantastic addition to the game. Adds a huge amount of complexity & realism, esp with respect to borrowing money & managing liquidity & maturities etc.

I'm a former banks analyst and hedge fund manager, as well as long time fan of the game, so hopefully I can provide some helpful feedback/suggestions.

1. Firstly, I think the acquisition of new branches (and HQ) ought to be done through the bank entity/balance sheet. You could simply add a PP&E line item into the bank balance sheet. This is important because if you want to expand your banking branches, at present you have to transfer capital out of the bank to the holding company, and then have the holding company buy the branches. It doesn't feel very realistic. It also means the return on capital the banking entity is generating is overstated as the bank balance sheet doesn't include any fixed assets.

2. Secondly, I think the size of bank branches at 3x3 is too large (same for auto branches, and all retail outlets that are not department stores/hypermarkets). 3x3 takes up too much room on the map and bank branches in real life are small.

3. At present, the level of necessary capital is tied to total assets rather than loans. This is a bit of a problem for a few reasons. Firstly, in real life the amount of capital you need to hold is tied to loans (or risk weighted assets more specifically). Secondly, in the game, if you are short of capital, what you do is simply lower deposit rates to lose some deposits, which shrinks total assets via shrinking cash, which improves the capital ratio even though the leverage/risk of the entity is rising. It also boost profitability as you pay interest on deposits. I like the fact that you have to monitor your liquidity & capital levels carefully, but capital should be tied to total loans (say max loans of 10x capital), and the way to improve your capital ratio would be to reduce the loans to total assets dial you have. That's more realistic as shrinking your loans reduces profitability. If you have a lag on how fast the loan book can shrink, it also means in stressed times when your P&L is in the red so capital is shrinking, that you can be squeezed into not having enough capital, which is exactly what happens in real life. It means if you run more leverage in the good times (lower capital ratio and higher loans to total assets), you make more money, but you risk being short of capital in downturn.

4. At present, deposits are too sensitive to a change in interest rates. If you reduce the deposit rate by merely 0.10%, you'll often see your deposits shrink by 1% a day or so, and it can create a liquidity crisis much too fast (and equally, you can raise more deposits to avert a liquidity crisis much too easily by simply raising rates a tiny bit). You should need to move the interest rate by much larger amounts than this, and there should be a lag.

5. There is not enough of an incumbency advantage for established banks (in real life banking is a scale business with high barriers to entry). In real life, established banks also have a significant funding cost advantage over new players. One way to do this is to differentiate between 'transactional' deposits which don't pay interest (or pay very little interest), and time deposits which pay a lot of interest (closer to central bank benchmark rates). What you could do is tie the level of customer service rating, brand, wait times etc to the amount of 'core' (transactional, low cost) deposits. As a bank invests in its network and customer service and brand, a greater share of their deposits come from transactional deposits which have a much lower interest rate (and are also much slower to change, and reflect relative brand/service quality etc more than rates), whereas anyone can pay up to get a lot of time deposits fast (where share should change more quickly and be rate sensitive). That way there is a greater reward to investing in customer service, brand, and the number of branches, in the form of lower funding costs. It also gives existing incumbants and advantage over new entrants.

6. A present you can't change the dials (set to 20% by default) for the different level of credit risks by credit rating. They are all stuck on the defaults of 20% each. I suggest that when you change them, the trend towards the new rating also has a gradual lag for the existing book (as opposed to new loans), reflecting the fact that it takes time for existing loans to be paid off etc. This requires the player to reduce risk in advance of a potential downturn.

7. Banks should be able to buy bonds (banks in real life buy bonds as well as make loans). You could add a tab bonds where you could buy bonds and monitor your portfolio of bonds. Banks should also be able to buy real estate and stocks (see #13 below). Bonds, real estate and stocks would be included with loans in the denominator of the capital adequacy calculation (max 10x risk assets to capital). This would also introduce a nice element because stocks and real estate is volatile, and so if prices fall, that would stress capital ratios much like it does in the real world, so the player would have to consider the risk of downturns in the stock market hitting capital.

8. On making loans to corporates, there should be an option for the player to select to not lend money (or more money) to specific corporates (you could list all corporates with a tick-box that was default on, but could be unselected). This allows the player to do credit risk analysis by looking at the individual companies, and deciding that some are good and some are risky, and to opt out of lending to those companies (which also aids in choosing what bonds to buy). This would be very value add imo.

9. Love the bond market & new lending from banks functions. Few things to add/refine here. Firstly, when your company goes to borrow debt tab in financial actions, there should be a full list of borrowings and maturities down the bottom, not just for the coming year. That allows a player to plan in advance how much liquidity they need and when. The bond section already has this in place, but it does not adjust the principal amounts when a player buys back bonds in the bond market. The amount of outstanding principle here should be reduced alongside bond buy-backs.

10. Banks should also also be able to issue bonds. This way they could supplement lower-cost deposits with higher-cost bonds for their funding, and it would require players manage their maturity schedule of bonds carefully.

11. For the bond market, I suggest you add an option to buy out bonds from corporations that own them at a premium, in much the same way as you pay a premium in the stock market where there is no public float to buy back stock. The level of the premium should be less than in the stock market (maybe 20-30% rather than 100%).

12. For bank deposits, the player, as well as the player corporation, should be able to deposit funds at a bank and earn interest. This would provide a way for the player that is holding cash to invest some of the proceeds & earn interest.

13. You could consider allowing banks to buy shares and real estate as well. It might even pay to treat the bank like a separate subsidiary, where it can also issue shares and IPO etc. Generally speaking I think you should create the option for the player to be CEO of its subsidiaries as well as the primary holding co, and not require an external CEO. This would allow not only the bank to be treated as a separate subsidiary, but would also allow a player to set up separate subsidiaries for different industries etc which they run, and then IPO them/manage them separately etc.

14. I see you've added a global stock market function, which is cool. I see you have municipal bonds, but have you considered having a national government bond market (with yields linked closely to benchmark rates), as well as adding like US treasury bonds like you did with global stocks?

15. For the overall economic graphs, there are no debt metrics shown - total deposits & loans, and relative to GDP etc. It would be good to be able to see the level of credit across each city & nation etc. This would suggest which markets had more growth potential, and also where the risks lie. When debt to GDP gets high there should be a much greater probability of an economic downturn, and debt and deposits to GDP should fall during a downturn. This should also affect the level of overall demand in the economy, and shrink the economy, much like it does in the real world. Meanwhile, a credit boom will boost demand. It seems like you have already incorporated some of this into your engines, but having the debt graphs would be a nice addition.

16. If you change the bank to a subsidiary model, instead of the current capital in and out tab with the reversible arrow, it might be better to have the standard capital management functions where you can inject capital/do a share issue to raise money, and then allow the bank to pay dividends (ordinary and special) to return capital. Makes it more realistic and less clunky. You could restrict the payment of dividends in the manner you currently do for level of funds you are able to transfer out of the bank (i.e. needing to comply with capital ratios).

17. Instead of having a fixed required 8% capital ratio, you could make this dynamic, just like the central bank interest rate model. You could have policy hawks and doves, which increase and decrease minimum capital ratios. Hawks would increase them, and in particular increase them after a crisis, which will require banks reduce leverage (and hurt the economy), while doves would decrease them to stimulate the economy. This would amplify booms and busts like in the real economy. You should also have announced increases/decreases implemented with a lag (perhaps 6-12 mths).


Outside of this DLC, a couple of general suggestions also:

1. Consider removing the restrictions on the minimum number of shares outstanding, and SEC regulations prohibiting certain trades. It doesn't really add anything positive to the game, and they aren't realistic restrictions anyway. You can't buy back shares for example if the share count goes below 1m on a 1-for-10 reverse split. There is no reason to have a mandatory 1-for-10 reverse split as well. The player should be able to buy shares in other companies which the player's corporation has shares in, and you should be able to direct your listed subsidiaries to buy back their own stock without restriction as well.

2. I see you've added a stock split option which is great. Perhaps allow the player to specify the ratio or add different ratios, like 2-for-1, 3-for-2, 10-for-1, etc. Also, you could add a voluntary reverse-split option also for a stock consolidation (rather than the current mandatory one done by the computer).

3. Consider adding a 'return on equity' metric, both to the stock market stats (along with P/E, P/B, and dividend yield), and also in the individual company analytics. Return on equity (RoE) is to equity what an interest rate is to a bond, and communicates how efficiently a company is converting its invested capital into profits.


Hope you find these suggestions helpful. Am a big enthusiast for the game so hope you incorporate.

Best,
Lyall

[LT3001]

PS one last thing. Ran smoothly most of the time but the game crashed a few times, stating "Text string not found in text resource, fix ID 2967 code LNR2." Might be worth looking into. Cheers

[David]

PS one last thing. Ran smoothly most of the time but the game crashed a few times, stating "Text string not found in text resource, fix ID 2967 code LNR2." Might be worth looking into. Cheers

Thanks for your inputs. Just want to let you know that this bug has been fixed since version 6.1.05.
Download link: http://www.capitalism2.com/forum/viewto ... 996#p28773

[LT3001]

Thanks will do. I've also made some minor edits to the above main text since posting which you may not have seen (wasn't expecting a reply so quickly!)

Great work with the new DLC.

Cheers,
Lyall

[David]

Hi Lyall,

6. A present you can't change the dials (set to 20% by default) for the different level of credit risks by credit rating. They are all stuck on the defaults of 20% each. I suggest that when you change them, the trend towards the new rating also has a gradual lag for the existing book (as opposed to new loans), reflecting the fact that it takes time for existing loans to be paid off etc. This requires the player to reduce risk in advance of a potential downturn.

Also want to let you know that this bug has been fixed in the current version already.

2. Secondly, I think the size of bank branches at 3x3 is too large (same for auto branches, and all retail outlets that are not department stores/hypermarkets). 3x3 takes up too much room on the map and bank branches in real life are small.

A user has suggested this as well, I have already suggested to the dev team for reducing its size to 2x2.

I will take time to read thru your post and will forward the relevant suggestions to the dev team.

By the way, are you still running a hedge fund presently? Any investment tips for an average investor like myself in the current market?

Best,
David

[LT3001]

PS on #5, what you could do is have an additional slider tab for investments in technology/ATM network, that was a lot like content spend for media companies, where the rating can go from 0 to 100. It costs a lot of money and changes slowly. The long term reward for this investment would be as the rating went up, the % of deposits that were transactional deposits that paid no interest would also slowly rise. This would steadily lower funding costs over time, and create a reward for making these significant investments. This would allow the bank to be more profitable in the long run and/or invest in lower risk assets, and would create an important advantage of incumbent banks long in operation over new entrants, much like what happens in media. I think this would be a great addition.

Cheers,
LT

[LT3001]

Hi David,

Thanks for your responsiveness. Yes I do still run my fund. Hard to provide easy tips I run a blog LT3000.blogspot.com which catalogs my thoughts on a number of investment related issues though.

Best,
Lyall

[LT3001]

PPS many of the suggestions I included above would be much easier to execute if you made the bank into a separate subsidiary, and treated it like you currently do existing subsidiaries (although allowing the player the option of being CEO of his/her own subsidiaries).

That way, it would be much easier for the banking subsidiary to purchase its own real estate/branches; issue its bonds; purchase bonds, stocks, & R/E; have capital infusions via IPO and new share issuances; and return capital through regular and special dividends. The P&L and balance sheet contribution would also come through to the parent company as a single line item as it currently does for subsidiaries, so it wouldn't muddy the group balance sheet with a lot of debt etc. Would solve a lot of problems and create a lot of flexibility in my view.

Cheers,
LT

[LT3001]

PS one last thing. Ran smoothly most of the time but the game crashed a few times, stating "Text string not found in text resource, fix ID 2967 code LNR2." Might be worth looking into. Cheers

Thanks for your inputs. Just want to let you know that this bug has been fixed since version 6.1.05.
Download link: http://www.capitalism2.com/forum/viewto ... 996#p28773

PS I downloaded the DLC only yesterday, played it yesterday & today for many hours. I see the updated version you posted was on 13th Nov? So it would seem that the issue has not yet been 100% resolved?

Thanks,
LT

[David]

When I edited the post with the info on the latest version, the forum software would only update the post text, but would not update the timestamp of the post. So it appeared that the post was posted on 13 Nov but in fact it was updated more recently.

FYI, you could see the version number of your Capitalism Lab at the top-right of the game's main menu and compare it against the latest version indicated in the post.

And thanks for the link to your blog. Looks like a very informative blog!