1 SimBank Bank Financial Management Simulation Fernando E. Arellano, Ph.D. University of Dallas...

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SimBankSimBankBank Financial Bank Financial

Management SimulationManagement Simulation

Fernando E. Arellano, Ph.D.Fernando E. Arellano, Ph.D.University of DallasUniversity of Dallas

Richard D. Johnson, Ph.D.Richard D. Johnson, Ph.D.Colorado State UniversityColorado State University

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¿What is SimBank?¿What is SimBank?

• SimBank is a software program that SimBank is a software program that simulates commercial bank operations.simulates commercial bank operations.

• Simulated operations pertain to the Simulated operations pertain to the financial management of a commercial financial management of a commercial bank.bank.

• Up to twelve quarters can be simulated.Up to twelve quarters can be simulated.

• Up to fifteen banks or teams can Up to fifteen banks or teams can participate in up to twelve quarters of the participate in up to twelve quarters of the financial management of a commercial financial management of a commercial bank?bank?

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Operations SimulatedOperations Simulated Making loans Making loans Receiving depositsReceiving deposits Making and receiving inter-bank loansMaking and receiving inter-bank loans Receiving loans from the FRBReceiving loans from the FRB Issuing and redeeming subordinated debtIssuing and redeeming subordinated debt Buying and selling Treasury securitiesBuying and selling Treasury securities Distributing dividends Distributing dividends Issuing and repurchasing stockIssuing and repurchasing stock Selling mortgage loansSelling mortgage loans

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• Making loansMaking loans– Commercial (two types)Commercial (two types)– MortgageMortgage– ConsumerConsumer– AgriculturalAgricultural

• Receiving depositsReceiving deposits– Demand deposit accountsDemand deposit accounts– Interest bearing transactionsInterest bearing transactions– Savings accountsSavings accounts– 6-month and 2-year CDs6-month and 2-year CDs

Main OperationsMain Operations

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Funding SourcesFunding Sources• Long term:Long term:

– Issuance of stockIssuance of stock– Subordinated debt (capital notes)Subordinated debt (capital notes)– Sale of mortgage loansSale of mortgage loans– Long-term deposits (2-year CDs)Long-term deposits (2-year CDs)

• Short termShort term– Deposits (demand deposits, interest bearing Deposits (demand deposits, interest bearing

transactions, savings, and 6-month CDs)transactions, savings, and 6-month CDs)– Inter-bank loansInter-bank loans– Loans from the FRBLoans from the FRB

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• The bank can invest in:The bank can invest in:– Treasury securitiesTreasury securities

•3-month Treasury bills3-month Treasury bills

•1-year Treasury notes1-year Treasury notes

•5-year Treasury notes5-year Treasury notes

•10-year Treasury bonds10-year Treasury bonds

• Excess liquidity (Fed Funds) can also be Excess liquidity (Fed Funds) can also be used to make inter-bank loans.used to make inter-bank loans.

Investment OptionsInvestment Options

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Characteristics of the Initial Characteristics of the Initial BankBank• Banks develop their operations in an economic Banks develop their operations in an economic

environment set by the instructor or by environment set by the instructor or by default.default.

• At the beginning of the simulation all banks At the beginning of the simulation all banks have the same:have the same:– Size, profitability and capital structure. Size, profitability and capital structure. – Loan portfolioLoan portfolio– Interest ratesInterest rates– Deposit structureDeposit structure– Expenditures in promotionExpenditures in promotion– Average salaryAverage salary– Number of branchesNumber of branches

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Economic EnvironmentEconomic Environment• Loan and deposit volumes respond to Loan and deposit volumes respond to

interest rates variations and expenditures interest rates variations and expenditures in promotion. in promotion.

• They also respond to general conditions in They also respond to general conditions in the economic environment (GDP, inflation, the economic environment (GDP, inflation, interest rates) and to a particular economic interest rates) and to a particular economic sector (housing, agricultural, consumer).sector (housing, agricultural, consumer).

• Additionally, in the case of commercial Additionally, in the case of commercial loans, they respond to levels of loans, they respond to levels of compensating balances.compensating balances.

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• They also respond to fees charged in They also respond to fees charged in demand deposits (DDA) and interest demand deposits (DDA) and interest bearing transaction (IBT) accounts. bearing transaction (IBT) accounts.

• Finally, loan and deposit volumes for a Finally, loan and deposit volumes for a bank are a function of average salaries bank are a function of average salaries and the number of branches.and the number of branches.

Economic EnvironmentEconomic Environment

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• There are transaction costs for:There are transaction costs for:– Making and receiving inter-bank loans Making and receiving inter-bank loans

with Fed Fundswith Fed Funds– Selling Treasury securitiesSelling Treasury securities– Issuing and redeeming subordinated Issuing and redeeming subordinated

debt (capital notes)debt (capital notes)– Issuing stockIssuing stock

Economic EnvironmentEconomic Environment

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• Each bank has to comply with a required Each bank has to comply with a required level of reserves. level of reserves.

• There is a minimum capital requirement.There is a minimum capital requirement.• In case any of the above requirements In case any of the above requirements

are not met, banks are subject to are not met, banks are subject to monetary penalties.monetary penalties.

• There is a minimum average salary for There is a minimum average salary for all banks.all banks.

• There is a maximum number of branches There is a maximum number of branches that a bank can open in any given that a bank can open in any given quarter. quarter.

Regulatory EnvironmentRegulatory Environment

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Bank InteractionBank Interaction• The banks in the simulation compete for The banks in the simulation compete for

loans and deposits. loans and deposits. • Competition is carried on through the Competition is carried on through the

setting of interest rates for loans and setting of interest rates for loans and deposits. deposits.

• Additionally, banks can set compensating Additionally, banks can set compensating balances in commercial loans. balances in commercial loans.

• Banks can also charge service fees on Banks can also charge service fees on demand deposits and interest bearing demand deposits and interest bearing transaction accounts.transaction accounts.

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• Each type of loan and deposit has aEach type of loan and deposit has ann interest rate elasticity on which allocation interest rate elasticity on which allocation of volumes to banks are determined.of volumes to banks are determined.

• Allocation of loans and deposits is also Allocation of loans and deposits is also determined based on:determined based on:– Expenditures in promotion by type of loan and Expenditures in promotion by type of loan and

depositsdeposits– Average salaryAverage salary– Number of branchesNumber of branches

Bank InteractionBank Interaction

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Bank Decisions in SimBankBank Decisions in SimBank

• Participants make decisions pertaining to:Participants make decisions pertaining to:– Interest rates for loans and depositsInterest rates for loans and deposits– Promotional expenditures by type of loan and Promotional expenditures by type of loan and

depositsdeposits– Compensating balances in commercial loansCompensating balances in commercial loans– Service fees in demand deposit and interest Service fees in demand deposit and interest

bearing transaction accountsbearing transaction accounts– Average salaryAverage salary– Number of new branchesNumber of new branches

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• Participants make decisions pertaining: Participants make decisions pertaining: (cont.)(cont.)– Inter-bank loans Inter-bank loans – Borrowing from the FRBBorrowing from the FRB– Issuance and repurchase of stockIssuance and repurchase of stock– Issuance and redemption of capital Issuance and redemption of capital

notesnotes– Distribution of dividendsDistribution of dividends


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• Decisions on interest rates and promotion Decisions on interest rates and promotion in prior quarters impact current quarter in prior quarters impact current quarter allocations. allocations.

• Funding is determined by short and long Funding is determined by short and long term bank decisions. term bank decisions.

• If funding is insufficient, the bank will If funding is insufficient, the bank will receive an unplanned loan from FRB at a receive an unplanned loan from FRB at a high interest rate.high interest rate.


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• The volume of each type of loan available The volume of each type of loan available for all the banks in the simulation is for all the banks in the simulation is impacted by:impacted by:– In Commercial LoansIn Commercial Loans

• Industrial Production indexIndustrial Production index• GDPGDP

– In Mortgage LoansIn Mortgage Loans• Number of new house permitsNumber of new house permits• GDP growthGDP growth

– In Agricultural LoansIn Agricultural Loans• Agricultural production indexAgricultural production index

– In Consumer LoansIn Consumer Loans• GDPGDP

Loan and Deposit Allocation Loan and Deposit Allocation CriteriaCriteria

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• The volume of each type of deposit The volume of each type of deposit available to all banks in the simulation is available to all banks in the simulation is impacted by the behavior of GDP and the impacted by the behavior of GDP and the average interest rate in each type of average interest rate in each type of depositdeposit


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• Loan deposits are allocated to each bank Loan deposits are allocated to each bank based on the following criteria:based on the following criteria:– Interest ratesInterest rates– Promotional expenditures (by type of loan and Promotional expenditures (by type of loan and

deposit) and total expenditures deposit) and total expenditures – In commercial loans, compensating balancesIn commercial loans, compensating balances– In DDA and IBT, service feesIn DDA and IBT, service fees– Average salaryAverage salary– Number of branchesNumber of branches

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• Total loan and deposit volumes are also a Total loan and deposit volumes are also a function of the economic environment. function of the economic environment.

• Some loans volumes are a function of the Some loans volumes are a function of the growth in a particular sector.growth in a particular sector.


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Evaluation CriteriaEvaluation Criteria

• After each quarter each bank receive After each quarter each bank receive points based on:points based on:– Stock priceStock price– ROEROE– Debt ratioDebt ratio– Liquidity ratioLiquidity ratio– Loan lossesLoan losses– Interest rate riskInterest rate risk

1 SimBank Bank Financial Management Simulation Fernando E. Arellano, Ph.D. University of Dallas...

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