Feedback needed: Is the profitability of banks adequate?

[JasonLJJ]

Thanks David, I am going to play the latest version now with low default settings. Will share my view on customer deposits / risky loans shortly.

I still think that the interest rate for the riskiest bonds are still quite low relative to the default rates (I've seen default rates in the teens) and would appreciate if there was an option to further increase the spread for extremely risky firms...

Would it be possible to lift the cap for deposits further to 99/100% (especially for personal wealth) instead of 50 for end game purposes - surplus cash needs a way to be invested and the bank is a great place to put it, as the global stock market remains quite buggy for me (my stocks decline in value overtime; dividend yield decreases as the higher my net worth and it takes very long time to accumulate large positions).

[David]

I still think that the interest rate for the riskiest bonds are still quite low relative to the default rates (I've seen default rates in the teens) and would appreciate if there was an option to further increase the spread for extremely risky firms...

If you could provide some data-based evidence on this (like the save game and screenshot I sent you), it will help me to convince the dev team to make the change as you advised.

Would it be possible to lift the cap for deposits further to 99/100% (especially for personal wealth) instead of 50 for end game purposes - surplus cash needs a way to be invested and the bank is a great place to put it, as the global stock market remains quite buggy for me (my stocks decline in value overtime; dividend yield decreases as the higher my net worth and it takes very long time to accumulate large positions).

The dev team is concerned about the exploitation of this -- by depositing a huge amount of cash into a competitor's bank and then withdraw it all of a sudden with the intent of creating a liquidity crisis on the competitor.

Perhaps we should address the issues of the global stock market instead? Would you please post in details about what needs to be improved on the global stock market?

[JasonLJJ]

No problem on the screenshot - I will share shortly. Thanks David for all the hardwork

On the deposit cap - I actually think there should be a penalty to taking out deposits in an untimely manner in addition to forfeiting the interest...5% seems like a good start to provide an disincentive to people from causing liquidity crisis at competitor banks.

[David]

On the deposit cap - I actually think there should be a penalty to taking out deposits in an untimely manner in addition to forfeiting the interest...5% seems like a good start to provide an disincentive to people from causing liquidity crisis at competitor banks.

I would recommend that you set up a poll on the Banking DLC forum on these two topics: 1) the deposit cap and 2) the penalty for cancelling a deposit before it matures. I think such polls will help us strike the right balance from people with different views on them. Then I can purpose the change requests to the dev team based on the poll results.

[JasonLJJ]

David, two things:

1) Thank you to you & the dev team in fixing up the deposit growth - it works perfectly now. Profitability of the bank (without competition) is decent and while I personally would like to raise the amount of deposits per city, I understand the developers concern that this would make banking sector too significant and neglect other parts of the economy

2) Please see attached the deposit crash screen cap re my previous issue about me unable to make multiple deposits

I will now proceed with the poll on raising the deposit cap + one-off penalty on early withdrawals as well as run the scenario analysis for risky bonds / unrisky bonds.

Jason

[JasonLJJ]

David, about the issues with C-Grade loans, I have run 3 scenarios with the bank with different loan distribution with the same settings and observed that throughout the game cycle (11 years of game play), the bank with 100% AAA loans (USD 62 bln life time profits) outperformed significantly the bank with both 100% CCC (USD 45 bln life time profits) and 20% across all grades (USD 46 bln life time profits). In all 3 scenarios the bank had deposits of USD ~150 bln and default rate for CCC loans spiked to 15%+ during severe recessions (low sensitivity to economic impact for defaults).

In real life, riskier loans will always command a significant premium in both short and long term. Given the high volatility (swing in default rate) and higher required capital base to maintain the venture's solvency in the long run, investors will demand a higher rate of return for the venture. Hence, the life time profitability of the loans should increase as the risk increases.

To make the game more balanced, I would like to suggest the following:
1) Increase significantly the profitability of CCC grade loans (25 - 38%+ under extremely high interest rate) to compensate for the fact that these firms are likely to fail and hence investors will need to be compensated for the risk as well as the higher capital buffer to protect against future losses
2) Mildly decrease the returns for AAA loans
3) Make the spread between each investment grade wider (4 - 6% difference between each grade. So if CCC was 38%, AAA should be 12%; if CCC was 25%, AAA should be 6%)
4) Slightly decrease default rates for the riskiest loans to a max of 12%

Overall, an investor into 100% CCC grade loans should expect to make ~23 - 25% return on asset annually over the life time (including losses from defaults)

Let me know your thoughts.

Note - I used a self-created mod that boosted the GDP of the economy. Should have limited impact on the study

[David]

Hi Jason,

The dev team has released a new version 6.1.06 whose main focus is improving the risk/reward balance of high-interest loans.

Please download it from: http://www.capitalism2.com/forum/viewto ... =52&t=6996

This new version changed the Banking setting “Economy's Impact on Loan Defaults” to a range of settings from “Low” to “Very High”. Gameplay balance improvements have been made to this setting. It now has a significantly greater impact on banks’ profitability. The default setting is Moderate.

I have played this new version myself and no longer it is the case that playing safe with a conservative loan portfolio would yield the most profit. And you could play with the improved Economy's Impact on Loan Defaults setting to find a gameplay balance that you find reasonable.

To maximize a bank's profit, now it is subject to many factors. The economic condition is definitely very important. If the game you play has a significantly longer period of economic good times than downturns, then banks which favor risky loans will benefit. On the other hand, if the game you play happens to have more frequent and longer lasting downturns, then the opposite is true. So there is no absolutely right way to set a perfect loan distribution.

By the way, would you be interested in writing a strategy article for banking? I think the community will benefit from such a article as a banking system being simulated in a game is something new to most gamers and is not as easy to grasp as the more familiar production chain mechanism.

And I will link your article to the Capitalism Lab web site's strategy tips page: https://www.capitalismlab.com/resources/strategy-tips/, if you are interested in writing it.

Thanks
David

[JasonLJJ]

Happy to help David. The file in the link is 6.105 though - can you re upload 6.106?

Also, any news on allowing cities to store cash in the bank and/or raising the deposit cap? The poll has a couple of responses and most of them are in favor of the two proposals I suggested, albeit it has a relatively small sample size. I think the raising of the deposit cap is especially relevant, given the pending release of the insurance update of this DLC

[David]

Happy to help David. The file in the link is 6.105 though - can you re upload 6.106?

It could be due to the CDN (content delivery network)'s cache not updated. I just refreshed the CDN and tested the download link. The downloaded file is v6.1.06. Please try again and see if the CDN now supplies you with the latest version.

Also, any news on allowing cities to store cash in the bank and/or raising the deposit cap?

Normally we would need to wait for more votes to get a consensus.

[JasonLJJ]

It seems to be based on the various polls the community would like to see an increase in the overall profitability of banks.

Some suggested methods to boost profitability of the sector:
1) 6th category of loan called "Credit Card loans" that is even riskier than CCC loans, but has returns in the 30s - 50s.
2) Non-interest income (i.e. selling life insurance policy on behalf of insurers, checking account fees, selling asset management products etc.) - this income could be small a % of customer deposits and be applied on a branch level - branches with higher foot traffic will have higher non-interest income / deposits. There are two goals: 1) Reward profitability of bank branches with high foot traffic; 2) encourage spending on banking branches / training to get more intense competition between different banking firms. On customer deposits on USD 10 bln, I would say non-interest income should be around 50-100 mln.

For the insurance update, would you mind sharing more details? I think there are many synergies between the insurance dlc and the banking dlc, especially on the product distribution side. There is such a thing called bancassurance deal which is basically an exclusive partnership between a bank and insurer to sell products.