DLC overview - Capital & Reserve Ratio discussion

[JohanPB]

Note : this got implemented in 6.1.8. The underlying issue is mostly solved
Greetings.

I've bought the Banking DLC

Although the game play seems promising, there are quite a few points that should be corrected.

Difference between bonds and bank-granted loans. Although they should behave in very different ways, loan principal being payed all along, and bonds principal being paid back on maturity date, I did not see or feel the difference in term of game play.

Banks reserve

Why does my company need to pour more money into the bank, when depositors already trust en masse my bank with their savings?

To explain what happen, I will take the Eurozone exemple

The reserve system is meant to be the minimal cash ratio the bank has to keep on hand to cover deposit withdrawal. Please see the European Central Bank explanation about this ratio

The compulsory part of this reserve of each commercial bank's account is a special account on the ECB, and usually bears interests, this deposit facility interest rate - but we live in strange times, and the current interest rate for these accounts is negative, I do not demand the game simulates these aspects too.

Entrusted with the savings of many people, minus the compulsory reserve, the commercial bank can do whatever it wants with the remainign money , mostky lending it to companies

Feature screen.png (178.8 KiB) Viewed 1119 times

The Required Bank Capital Ratio should be renamed as Required Bank Cash Ratio
The Maximum Loans-to-Assets Ratio should be removed from the game, and replaced by a Complimentary Cash Ratio - ajustable from in-game bank management screen - if you want your bank to hold on more cash than legually required.

The role of Equity Capital should be to jump start the bank, when deposits are few.


Here is the main culprit :

Assets - Equity - Liabilty.png (151.4 KiB) Viewed 1119 times

Even if I jumpstarted the bank with 26 millions, my bank has $80,378,427 in cash, compared to $275,863,173 of customer depositn which gives me a real reserve ratio of 29,14%. The last thing my bank needs is more cash in its reserve.

Regards.

Edit : clarified title.

[David]

The Maximum Loans-to-Assets Ratio should be removed from the game, and replaced by a Complimentary Cash Ratio - ajustable from in-game bank management screen - if you want your bank to hold on more cash than legually required.

I searched for "Complimentary Cash Ratio" on Google but didn't find any relevant results. Do you have some web links that explain this ratio to share?

The Required Bank Capital Ratio should be renamed as Required Bank Cash Ratio

Tried to get an understanding of what you said so that I can convey it to the dev team.

Would you please explain why it is necessary to rename The Required Bank Capital Ratio as Required Bank Cash Ratio?

So just renaming it without having to change the underlying formula?

Regarding the Bank Capital Ratio, I found the following related articles on the web:
https://en.wikipedia.org/wiki/Capital_requirement
https://www.investopedia.com/terms/t/ti ... -ratio.asp

I haven't found an article exactly matching the term "Required Bank Cash Ratio" on Google. Do you have any links to share?

[JohanPB]

Thanks for your explanations. It appears I have misunterstood what the in game ratio meant , let's try and fix that.


There are two main ratios for a bank, that both have their importance :

• The Tier 1 capital ratio, the one that is currently used under the name "Bank capital ratio"
• The mandatory reserve ratio, i-e the fraction of deposit in cash always needed on hand to cover day-to-day wthdrawals. This is the one I had in mind from the get-go, and this should be a game setup slider.

According to your own link https://www.investopedia.com/terms/t/ti ... -ratio.asp, the amount held in cash counts for nothing,0% in this ratio. That's not the case as of version 6.1.06-beta, and that's the reason of many issues - why do I need to capitalize my bank so often?

On the screenshot I posted in my first message, assuming all loans have a risk weight of 100% - regardless of their credit rating - the Tier 1 ratio would be 26,922,319/222,407,065 = 12,10%
But obviously the AAA credit line doesn't have the same risk weight as the C line. The real figures should be found somewhere but a wild guess would be 1% for AAA to 80% for C. Finely tuning these risk weight may be a in game setting.

In fact the Tier 1 ratio is such a crucial beast it deserves its own subpage on the bank financial tab.

The Maximum loans-to-asset ratios should not be on the game setup, but remain part of the Bank HQ operation screen.

[David]

According to your own link https://www.investopedia.com/terms/t/ti ... -ratio.asp, the amount held in cash counts for nothing,0% in this ratio. That's not the case as of version 6.1.06-beta, and that's the reason of many issues - why do I need to capitalize my bank so often?

Actually it is one of the related links I found when I searched for "Bank Capital Ratio" on Google. The other link https://en.wikipedia.org/wiki/Capital_requirement in the search results may be more relevant. Just wanted to clarify that I did not imply that the game's Bank Capital Ratio is Tier 1 capital ratio.

I could ask the dev team for more exact details if you want me to do so.

According to the in-game help text:

Bank Capital Ratio
The capital ratio is the ratio of a bank's Equity Capital to its total Assets. A bank must maintain a capital ratio that meets the central bank's requirement.

Required Bank Capital Ratio
The central bank requires banks to have set aside enough capital to cover unexpected losses and keep themselves solvent in a crisis.

The game takes a more simplified approach and does not simulate Tier 1 capital ratio as it would be too complicated for a game. To my understanding, it just simulates a more general bank capital ratio which is the bank's Equity Capital to its total Assets. Do you see any issue with this simulation approach? If so, how would you recommend for improvements?

The Maximum loans-to-asset ratios should not be on the game setup, but remain part of the Bank HQ operation screen.

The help text for Maximum Loans-to-Assets Ratio on the New Game Settings menu is:

This determines the maximum amount of loans that a bank can lend out. A conservative bank may set a lower Loans-to-Assets ratio on the bank HQ interface, provided that it does not exceed the one defined here.

I noticed that there is some misunderstanding and have informed the dev team to correct it. The revised text would be:

This determines the absolute maximum amount of loans that a bank can lend out (including your bank and AI banks). A conservative bank may set a lower Maximum Loans-to-Assets ratio on the bank HQ interface, provided that it does not exceed the one defined here.

And the help text for the Maximum Loans-to-Assets ratio on the bank HQ interface is:

The maximum amount of loans that the bank can lend out is restricted by this ratio. A higher ratio increases incomes from loan interests but it also increases the bank's liquidity risks.

For example, if the Maximum Loans-to-Assets ratio on the new game settings menu is set to 90%, then on the bank HQ interface, the player can set the Maximum Loans-to-Assets ratio to any value not higher than 90%.

Are the above help messages now clear enough in your opinion? If not, how would you suggest modifying the help text to make it better?

[JohanPB]

The game takes a more simplified approach and does not simulate Tier 1 capital ratio as it would be too complicated for a game. To my understanding, it just simulates a more general bank capital ratio which is the bank's Equity Capital to its total Assets. Do you see any issue with this simulation approach? If so, how would you recommend for improvements?

(emphasis mine)

Tier 1 ratio needs to be simulated more closely, as it is a risk evaluation. The key word is risk.

At the very least, cash in the bank vault means there is no risk taken with the corrresponding sum, no matter its origin - shareolder equity or customer deposits.
The fact that cash is taken into this ratio makes it fail in many way.

When the capital shortfall popup appears, the needed sum will not bring the Equity capital to Assets ratio back to its required level. As the cash we just brought becomes an asset too, the ratio will be slightly under the required level.

Before Transfert 2019-11-26 075100.png (132.38 KiB) Viewed 1042 times

This bank is under the 8% ratio, so the shortfall window popped up, pausing the game. Fine, let's bring $3 millions of Equity Capital.

After transfert 2019-11-26 075831.png (173.39 KiB) Viewed 1042 times

Why did not I get 3 millions more in equity, but slightly less?
Why did the bank grant 9 millions worth of loans while in pause?

For me, I was over ratio, around 12%, in both cases.
Bringing more cash here is like bringing coal to Manchester.

To make a long story short, on this screen, there should be 2 ratios.

Ratios.png (156.51 KiB) Viewed 1042 times

The Ratio in solid is the reserve ration = Cash / [Deposit By customer]
In dashed lines , The Bank capital ratio should be changed to [Loans to Customers] / [Equity capital]

Both ratios are pretty simple, use no other information than the one already shown, and would better simulate the bank.

[JohanPB]

The direct consequence of the wrong formula is that the required shortfall doesn't even cover the ratio

Shortfall 2019-11-26 082540.png (144.18 KiB) Viewed 1041 times

BT 2019-11-26 082705.png (34.05 KiB) Viewed 1041 times

T0 2019-11-26 082758.png (148.16 KiB) Viewed 1041 times

T1 2019-11-26 082852.png (33.99 KiB) Viewed 1041 times

AT 2019-11-26 083009.png (34.72 KiB) Viewed 1041 times

[David]

In dashed lines , The Bank capital ratio should be changed to [Loans to Customers] / [Equity capital]

What should this [Loans to Customers] / [Equity capital] ratio be called?

[JohanPB]

Let's rename it into "Simplified Tier 1 Ratio", because that's what it is.

[David]

Are you sure that it is [Loans to Customers] / [Equity capital] ratio, not the other way round [Equity capital] / [Loans to Customers] ?

I just Googled and found this article:
https://www.fool.com/knowledge-center/w ... ratio.aspx

Is [Risk Weighted Assets] referred in the above article equal to [Loans to Customers] in the game for this "Simplified Tier 1 Ratio" ?

[David]

One more thing: the bank's balance sheet only has Equity Capital, which is unlike the corporate balance sheet's various equity accounts including Common Stock and Retained Earnings. So I suppose that a bank's Equity Capital is a consolidated amount of both the bank's Common Stock and Retained Earnings.

Given this, is it still appropriate to call it Tier 1 Ratio, as from the article https://www.fool.com/knowledge-center/w ... ratio.aspx, it states that it Tier 1 Ratio should use Core Capital. When the bank's Equity Capital includes Common Stock and Retained Earnings, is it still the same as Core Capital?