Latest screenshots of the Bank HQ

[David]

Here is a bunch of screenshots showcasing the latest the Bank HQ user interfaces.

The dev team is in the process of preparing the banking features for beta release. Stay tuned.

[Arcnor]

Looks great! Can’t wait to try it out!

[buells]

Maximum loan to deposit ratio of 80%? In the U.S. this ratio is set by the central bank at 10x (so 1,000%). In fractional reserve banking, when a bank makes a $100 loan, the bank creates $100 of new money in a sense because now both the borrower and depositor have $100 each. In other words, 10% of deposits need to be held in cash. Loans create deposits that can be made into the original bank or a different bank. Now the original bank needs to fund the loan it made somehow, so it does need deposits or reserves, which it can borrow from another bank (say, the bank where the customer deposited the proceeds of the loan).

Depositors aren't worthless to banks, of course (exception for negative rate countries perhaps). Deposits tend to come with lower funding costs than wholesale funding from other banks. Wholesale funding can be managed in real time via transactions in the repo market, etc. to maintain equilibrium.

Regulatory capital requirements are the practical limitation on bank lending in the modern world. Equity and long-term capital need to be included in some measure in a bank's funding structure based on the riskiness of its assets. Risk capital is more expensive, but it reduces the chances of depositors having to absorb losses in the event of a liquidity crisis and the probability of a liquidity crisis in the first place. In theory, if not practice, leverage has little impact on bank returns due to a neutral

https://www.investopedia.com/articles/i ... -loans.asp

[David]

Let me first try to understand your viewpoints. Then I will forward your inputs to the dev team.

Here is what I found about the meaning of loan-to-deposit ratio on Internet:

https://www.investopedia.com/terms/l/lo ... -ratio.asp

From the article:
KEY TAKEAWAYS
The loan-to-deposit ratio is used to assess a bank's liquidity by comparing a bank's total loans to its total deposits for the same period.
To calculate the loan-to-deposit ratio, divide a bank's total amount of loans by the total amount of deposits for the same period.
Typically, the ideal loan-to-deposit ratio is 80% to 90%.

In the game, the loan-to-deposit ratio can be adjusted by the player, as hinted by the [+][-] buttons on the screenshots.

It seems to me that the current implementation is aligned with what is described in the aforementioned article.

[CK1309]

Here is a bunch of screenshots showcasing the latest the Bank HQ user interfaces.

The dev team is in the process of preparing the banking features for beta release. Stay tuned.

Good job,

[buells]

Thanks. I guess my question is what the mechanism is. The way I think about it is that deposits and loans are both separate lines of business for a bank. Banks seek deposits as a form of cheap funding, so being able to get lots of deposits is a good thing, in some cases irrespective of whether you have a good lending franchise. My mother is a private banker and gets compensated both for bringing in deposits and setting up mortgages, among other activities. A bank can lend out its excess reserves to other banks who will then lend out the money (though in Europe there are too many excess deposits so they have to keep reserves in the central bank at negative interest rates!). The margin on lending to other banks is small, so more profit can be generated from lending out deposits to commercial or retail customers. Banks can also fund new loans by borrowing reserves (coming from deposits) from other banks. Also, loans actually create new deposits because when you loan out a customer's funds to the

In reality, loans and deposits do not directly constrain one another, but it isn't wrong to be able to set the bank's strategy based on a target loan to deposit ratio. For gameplay purposes, it is probably fine to have loans always be less than 100% of deposits.

I would like to raise another concept to consider: deposit beta. When the interest rate set by the central bank increases, the interest rate paid to depositors does not necessarily rise commensurately. The rate on interbank lending generally does, however. In other words, the spread interest rates on deposits and loans does not stay constant over time and is highly dependent on a particular bank's business model. For example, internet banks that offer high interest rates, but little convenience in terms of access to free ATMs, checking accounts, integration with brokerage platforms, etc. have high deposit betas. Their cost of funds tends to rise closer to 1 for 1 with interest rates because they compete on price. Major retail banks like BofA, Citi, Chase, Wells Fargo, etc. have lower deposit betas because their customers are not as sensitive to changes in interest rates (pricing). In truth, however, if interest rates rose significantly, they would eventually compete with each other to raise rates on deposits eating up most of the incremental margin.

In terms of lending, I would just stress that the most important factor in how much a bank is able to lend is leverage or in other words, its capital ratio (normally considered these days on a risk weighted basis). Of course, losses and dividends reduce bank capital and net income and capital contributions increase it. More so than LDR, leverage is the factor that drives the riskiness of a bank and its profitability. This is because deposits are not ultimately a permanent, loss absorbing source of funding, but a component of leverage. You can have an LDR of 50%, but if you're equity capital is only ~5% of assets, smallish loan losses can still make you insolvent. Here is a hypothetical simplified balance sheet scenario. If the loans are held at book value with no provision, the bank probably can come back to solvency from this scenario due to positive net interest income.

Time 1:
Cash: $55
Loans: $50
Total Assets: $105

Deposits $100
Equity $5
Total Liabilities and Equity: $105

*Loan losses of $6 occur*

Time 2:
Cash: $55
Loans: $44
Total Assets: $99

Deposits $100
Equity ($1)
Total Liabilities and Equity: $99

The question is, when does a bank go bankrupt? The above bank could meet substantial depositor redemptions (a run on the bank) with its massive amount of cash on hand. Lehman Brothers could not because it had very short term liabilities and illiquid assets creating a liquidity crisis when the perceived value of its assets fell below that of its liabilities. To me, this is the hardest piece to incorporate, but an important one. Banking crises are as old as banking itself and a very important part of what dictates the ultimate success or failure of a banking institution.

[David]

We have posted a new article titled "Understanding Bank Capital Requirements" on the official Capitalism Lab web site:
https://www.capitalism2.com/forum/viewt ... =52&t=6990

I believe that it would answer some of the questions you asked in your last post.

[buells]

Thanks, that makes sense. This basically makes the bank's solvency tied to the holding company. It would be cool if banks could issue their own bonds or borrow money from other banks (one long term financing and the other short term) with the rate of interest for each above that of the rate paid to depositors. That's nice to have, but not critical.

Can you let your bank go bankrupt instead of taking down your whole company? What happens if the bank's capital is okay but it runs out of cash? Is there any situation where depositors start pulling money out of the bank? Here is an idea: allow bank capital to be below the central bank threshold for a probation period of up to, say, a year before requiring a capital injection. Again, not a need to have, but a nice to have maybe.

In terms of incorporating the "liquidity crisis" element, maybe have an event where depositors start to withdraw funds temporarily inversely proportional to the level of bank capital. Or depositors could stay put, but loans from other banks could are called and dry up for a period creating a problem if you are relying on them too much.

The mechanism you have works. I'm just thinking of some fun twists that could be added.

Thanks for the great product you guys have created and continue to improve upon!

[vunguyen95148]

In terms of incorporating the "liquidity crisis" element, maybe have an event where depositors start to withdraw funds temporarily inversely proportional to the level of bank capital. Or depositors could stay put, but loans from other banks could are called and dry up for a period creating a problem if you are relying on them too much.

I like this idea. In addition, we could have depositors or customers to withdraw their money from the bank during depression or when the economy is bad.