Feedback needed: Is the profitability of banks adequate?

[JasonLJJ]

It would be great to incorporate the financials aspect of cities into the banking dlc - banks often lend to governments and vice versa. Since over time a healthy city will have high levels of cash, it makes sense for them to store than money with banks.

Also, it would be interesting to allow governments to lend directly from banks instead of using the bond market - after all, the two are supposedly interchangeable

[JasonLJJ]

David - the recent changes in removing the cap for loans as well as increase in net interest margin makes the game play for banking much more balanced. Thank you for listening In my experience, deposits per city (wage rate 100, unemployment rate of 2%) stagnate around USD 25 bln and grow 5% ish per year...seems somewhat reasonable...

To further add flexibility to game play, perhaps you can also raise / remove the corporate deposit % cap so players who want to turbo charge the profitability of their banks during the early stages have the ability to do so? Also, from an "end game" perspective, players whose firms are super profitable (as well as related subsidiary) may want to deposit some of the surplus cash in the bank and this would allow them to do so.

I noticed that governments sometimes are able to generate huge amounts of surplus capital which just piles up in their banks - would it be possible to give us the option for governments to make bank deposits too?

Finally, how does the AI decide between a loan from a bank vs. bond market?

[David]

Currently you can set the corporate deposit cap to a maximum value of 20%. How would you suggest changing the maximum value?

[JasonLJJ]

Perhaps make it 100% as a max - all I want is to be able to put all my surplus capital in the bank so it can earn some interest

[David]

Perhaps make it 100% as a max - all I want is to be able to put all my surplus capital in the bank so it can earn some interest

OK. I will forward your suggestion to the dev team.

As far as I know, the latest version has fixed all the reported bugs and issues.

Besides the deposit cap, do you think the banking system is now good enough?

The dev team will soon shift their focus to the insurance company feature, which is a good sign of progress. But if there are still any major issues of the banking system that you are aware, please let me know and I will forward your comments to them.

[JasonLJJ]

Another outstanding issue is around marketing - for cities where I invest in marketing for the bank branch (via search engine), the brand rating slowly decreases to zero in that city while it increases in other cities. Would love if you could fix that

[JasonLJJ]

The banking system seems quite good - net interest margin seems quite reasonable. Default rates for different ratings of bonds seems reasonable but due to the relatively low interest rate for a C grade loan, it gives me an incentive to just play it safe and loan only to the safest customers... Perhaps make the spread wider between the riskiest bonds and the less risky bonds?

It would be great if customer deposits could grow in-line with total GDP growth (rather than just consumption part of GDP right now)

Other than that, this has been a perfect update

[David]

The banking system seems quite good - net interest margin seems quite reasonable. Default rates for different ratings of bonds seems reasonable but due to the relatively low interest rate for a C grade loan, it gives me an incentive to just play it safe and loan only to the safest customers... Perhaps make the spread wider between the riskiest bonds and the less risky bonds?

As far as I know, the interest rate of the a C grade loan is tied to the interest rate of a C grade bond. So increasing it will also increase the cost of borrowing by corporations. In light of this, how would you suggest improving the gameplay balance in this aspect?

Have you observed the AI companies and see if those overweight on risky loans tend to do better or worse?

It would be great if customer deposits could grow in-line with total GDP growth (rather than just consumption part of GDP right now)

I recall that the dev team told me that it is already affected by the total GDP growth now since the last update.

Other than that, this has been a perfect update

Good to know that.

I have recently received a user's question as follows. I was wondering if you could post some answers to the questions based on your experience with the DLC. Thanks.

I have a few questions if you don't mind. I spent most of yesterday trying to run a bank without outside finance but couldn't find away either running out of cash as depositors left or had to add money due to the Bank Capital ratio. To me it makes sense but also adds confusion in my mind. Is this the same system," The reserve ratio in the United States is 10%. This means for every $100 the bank receives in deposits, $10 must be retained by the bank and not loaned out, while the other $90 can be loaned or invested" or does that refer to the Maximum Loan to deposit ratio in the game?
Or is the next paragraph more suitable " A capital requirement (also known as regulatory capital or capital adequacy) is the amount of capital a bank or other financial institution has to have as required by its financial regulator. This is usually expressed as a capital adequacy ratio of equity as a percentage of risk-weighted assets. These requirements are put into place to ensure that these institutions do not take on excess leverage and become insolvent. Capital requirements govern the ratio of equity to debt, recorded on the liabilities and equity side of a firm's balance sheet. They should not be confused with reserve requirements, which govern the assets side of a bank's balance sheet—in particular, the proportion of its assets it must hold in cash or highly-liquid assets. Capital is a source of funds not a use of funds.

[JasonLJJ]

On C-Grade Loans
Given extremely high interest rate scenario, even with C-grade loans making up ~15% of the portfolio, due to default rates, I often see myself making less money than investing 100% triple A loans. In real life, default rates for junk bonds are at most 15% (severe recession) and ~5% in a normal year, and interest rates are often 3-5 times that of very safe bonds (15-20% vs. 4-6%) to compensate for the higher risk associated with these securities. Also, given the fact that if you have a large proportion of your portfolio in C-grade loans, you will need to have a higher capital buffer to ensure you have sufficient capital to weather the defaults. With that in mind, I would suggest that C-Grade loans have an interest rate of 35-50% in the scenario when AAA loans have 9-13% interest rate, with default rates for C-grade loans around 15% during recession and 2-5% during normal years (all this assuming extremely high interest rate option)

On customer deposits
I believe that giving a larger range for personal deposits (max of 5000 instead of 500) would provide more optionality to players who want to have financial institutions as a core business and invest in subsidiary operating companies who conduct operating activities. In my very brief experience playing with 6.104, the deposits increase most dramatically when consumer GDP increases while any trade/investment/government spending induced increase in GDP doesn't impact it much... would love any clarification around that

[JasonLJJ]

To clarify the "recession" bit - I am referring to a crisis like 2007. Interest rates during that period were around 5% and subsequently declined to ~1%...

https://www.investopedia.com/articles/i ... tdowns.asp

" The Financial Crisis of 2007-2009

When the subprime scandal broke, many of what were called “toxic assets” involved in the crisis were in fact linked to high yield corporate bonds. The scandal here arises from these subprime or high yield assets being sold as AAA-rated bonds instead of “junk status” bonds. When the crisis hit, junk bond yield prices fell and thus their yields skyrocketed. The yield-to-maturity (interest rate on the bond) for high-yield or speculative-grade bonds rose by over 20% during this time with the results being the all-time high for junk bond defaults, with the average market rate going as high as 13.4% by Q3 of 2009."