Feedback needed: Is the profitability of banks adequate?

[lillud321]

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

I would also really like to see this Idea put into the game because Older cities have the tendency to have a lot of exta cash . i

I would like to add 3 ideas.
1- Could there be a way to transfer a whole sector of activity from one subsidiary to another and also to the parent compagnie. I often like to separate my different sectors of activity but i have to transfer all the firms individualy when therer is a merger . This would be really nice because right now in my game. I have a subsidiary with a bank . I want to have a merger with a other compagny who has a bank . But rigt now , if i buy a private own compagny , it will merge with the parent compagnie because i cant choose a subsidary to fuse with. So i have to trasfer over 200 firms ( not only banks) manualy.

2- I have notice that people in the game also don't invest in banks. I have a ceo of a compagny who has over 2 billion in cash and zero in the banks.


Thank you for the game . I really love playing it

[JasonLJJ]

I think the key issue is that the volatility in customer deposits (due to the fluctuation of economic cycle) means that the bank is often running out of funds as the economy turns down (all of the cash has been loaned out) which means the user needs to inject new capital into the bank to maintain solvency. There are two ways of mitigating this: 1) Stop loans during peak of the cycle to ensure that the bank has sufficient cash in anticipation of the decline of deposits; 2) Make it so that deposits don't decline, but just grow slower (faster growth in boom, slower growth in depression) so that the user does not face this issue.

Conceptually the mechanics you have right now are fine; just need finetuning of some of the numbers

I would say that the ideal perpetual growth rate of customer deposits is something like 3% + X% of GDP (X = 50%?) capped at 15% and the growth of deposits never being negative; as I mentioned, give users the optionality to have high "max deposits" (ranging from USD 10 bln per city to 250 bln)

In the real world, the banking system is typically over 100% of GDP but I guess if we did that we'd skew the profitability of banks too much.

"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."

[David]

Hi Jason, thanks for your inputs. I've forwarded them to the dev team.

[JasonLJJ]

Thanks David

Also, whenever you try to make two deposits of the same time frame (i.e. USD 2 bln savings account deposit on 1/1/2000, then another USD 2 bln deposit into savings account), the game crashes upon pressing deposit the second time.

No issues when trying to deposit under a different time frame (i.e. USD 2 bln in savings, USD 2 bln in 5 year)

That's all

David - any guidance as to when we can play the latest update with the relevant amendments re deposit cap, increased interest spread for riskier loans and a more realistic customer deposit cap and growth?

[David]

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)

Hi Jason, I ran a test game for a few hours for the purpose of studying the financial performances of AI banks in correlation to their loan portfolio compositions.

After running the game over a period of 31 years, the banks which outperformed in lifetime profits are those with a higher concentration on low grade loans, as illustrated in the attached screenshots.

I think the lifetime profit figure on the bank income statement is a more accurate measure of a bank's performance than the annual profit data which may fluctuate greatly throughout an economy cycle. And reviewing a bank's total profit over an extended period of time, as opposite to the profit in the recent couple of years, would also provide a clearer perspective on the overall profitability.

For your reference, I've also uploaded the save game to the following site for your download: https://caplab.b-cdn.net/savegames/AI_Banks.rar

In addition, there is a new game setting called Economy's Impact on Loan Defaults.

Here is its help text:
It determines the economy's impact on the loan default rate. When this is set to a higher value, loan defaults will soar at a higher rate during an economic downturn, leading to a potential liquidity crisis.

I would recommend that you try with different settings and see if there is one that you think is better in terms of creating a well balanced risk/reward trade-off for giving out high risk loans.

[David]

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

Your above concerns would be addressed by the latest version 6.1.05 in the following ways:
1) Changed the maximum value of corporate deposit cap from 20% to 50%, on the New Game Settings menu.

2) Reduced the economy’s impact on customer deposits. The total amount of customer deposits in a city is affected by the city’s GDP growth rate, but to a lesser extent than the previous version.

To clarify, the game does not single out consumer GDP -- it in fact uses the overall GDP growth rate -- in this component of the simulation.

[David]

1- Could there be a way to transfer a whole sector of activity from one subsidiary to another and also to the parent compagnie. I often like to separate my different sectors of activity but i have to transfer all the firms individualy when therer is a merger . This would be really nice because right now in my game. I have a subsidiary with a bank . I want to have a merger with a other compagny who has a bank . But rigt now , if i buy a private own compagny , it will merge with the parent compagnie because i cant choose a subsidary to fuse with. So i have to trasfer over 200 firms ( not only banks) manualy.

I would recommend that you create a new post with a poll for this in the Suggestions forum. When the poll gathers enough support, there is a higher chance that the dev team will consider that.

2- I have notice that people in the game also don't invest in banks. I have a ceo of a compagny who has over 2 billion in cash and zero in the banks.

This is in the dev team's task schedule.

Thank you for the game . I really love playing it

Thank you for your support and all the useful feedback!

[David]

I think the key issue is that the volatility in customer deposits (due to the fluctuation of economic cycle) means that the bank is often running out of funds as the economy turns down (all of the cash has been loaned out) which means the user needs to inject new capital into the bank to maintain solvency. There are two ways of mitigating this: 1) Stop loans during peak of the cycle to ensure that the bank has sufficient cash in anticipation of the decline of deposits; 2) Make it so that deposits don't decline, but just grow slower (faster growth in boom, slower growth in depression) so that the user does not face this issue.

Conceptually the mechanics you have right now are fine; just need finetuning of some of the numbers

I would say that the ideal perpetual growth rate of customer deposits is something like 3% + X% of GDP (X = 50%?) capped at 15% and the growth of deposits never being negative; as I mentioned, give users the optionality to have high "max deposits" (ranging from USD 10 bln per city to 250 bln)

In the real world, the banking system is typically over 100% of GDP but I guess if we did that we'd skew the profitability of banks too much.

This has been addressed in the following change in v6.1.05 which is also mentioned in my previous post:
2) Reduced the economy’s impact on customer deposits. The total amount of customer deposits in a city is affected by the city’s GDP growth rate, but to a lesser extent than the previous version.

Please give the new version a test and see if deposit amounts still shrink by too much, posing excessive liquidity challenge to the player. If so, the dev team will consider further reducing its impact.

[David]

Also, whenever you try to make two deposits of the same time frame (i.e. USD 2 bln savings account deposit on 1/1/2000, then another USD 2 bln deposit into savings account), the game crashes upon pressing deposit the second time.

No issues when trying to deposit under a different time frame (i.e. USD 2 bln in savings, USD 2 bln in 5 year)

I attempted to trigger the error by placing several deposits into the saving account of the same bank but it worked well and didn't crash.

Maybe the way I made the deposits was different than yours. Could you please provide a step by step instruction for doing so.

You may also let me know the error message you got (you may post a screenshot with the error message.)

Thanks

[David]

David - any guidance as to when we can play the latest update with the relevant amendments re deposit cap, increased interest spread for riskier loans and a more realistic customer deposit cap and growth?

The new version 6.1.05 has just been released: https://www.capitalism2.com/forum/viewt ... =10&t=6995