CESIM BANK SIMULATION

Introduction

Simulation for banking and financial

services

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The goal of the Cesim Bank Simulation is to facilitate understanding of the

front and back office operations of a bank, and their interaction in a

competitive environment, and to help cultivate holistic and fact-based

management culture, develop analytical skills, and create awareness about

the current banking operating environment.

The task for the participating teams is to manage a bank with several front

and back office operations in a single geographical market. In the role of a

bank manager, the teams will be responsible for retail and SME clients,

lending and borrowing, front office and back office, and customers with

deposits, mortgages and investments. They’ll have personnel to manage, IT

systems to develop, regulators to report to and capital markets to raise

financing from, provided that they are pleased with the way the bank is

managed.

What is Cesim Bank Simulation?

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Key learning goals include:

a. Balancing risks and the growth of the balance sheet.

b. The division of sources of bank funding into core deposits and managed

liabilities.

c. Understanding the bank income statement and balance sheet.

d. The function of the central bank as the lender-of-last-resort.

e. Bank specific solvency and liquidity measures and regulation according to

Basel III.

f. Bank specific terminology and results presentation including many unique

financial ratios.

g. Uniqueness of money as the bank’s core product.

h. Profitability of different customer segments.

i. Understanding basic banking products and services and their

interconnectedness.

Learning Goals

4

Learning Process

Applying new ideas

Analysis & planning

Observations & reflections

Results & teamwork

Generalizing from the

experience

Lectures & discussion

Concrete experience

Decision making

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Targeted at

Educational sector Financial services industry

a. Introduce banking to participants in a

new, much more engaging way

b. Allow the participants to learning

complex banking issues by making

them in charge of their own bank and

compete against their peers

c. Content configuration options allow for

targeting optimal learning outcomes

a. Illustrate core banking topics

b. Demonstrate the interaction of different

banking functions in a competitive

environment or key initiatives in a

simulated, yet familiar setting

c. Broad range of customization

possibilities out of the box

d. Great platform for custom development

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The simulation is completely web based. There is no need to install any

separate applications and the simulation can be accessed from any computer

that has an internet connection.

The simulation platform allows team members to work virtually if they wish.

Each team member has her/his own account that enables them to make

decisions and scenarios on their own and later combine the outcomes with

the other team members on the [decision checklist] -page.

The platform also includes a communications forum that can be used to

communicate within teams and between all teams in one market.

Web Based Solution

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The simulation platform includes the following pages:

[Home] - Overview page with deadlines

[Decisions] - All decisions are made under ’Decisions’

[Results] - Results become available in this area after each deadline

[Schedule] - Simulation schedule is available on this page

[Teams] - Teams and team members in your market can be viewed here

[Readings] - Access to the decision making instructions and case description

[Forums] - Access to the discussion forums for team and market

Simulation Platform Structure

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Each simulation market consists of 2-12 teams, with 1-8 members in each.

The number of parallel simulation markets is not limited, making it possible to

utilize the simulation for any number of students in the class.

All teams are starting from exactly the same position, with similar market

shares and profits. Equally, teams will face the same market conditions during

the simulation.

Note that the teams compete against other teams in their own market,

not against a computer. The decisions of each team influences the other

teams’ results and the market development overall.

Simulation Organization

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As an instructor you have significant discretion over the basic structure of the

simulation market. By default, all Cesim Bank Simulation courses are set to

include a limited set of functionality that can nonetheless be complemented

through [Case management]

If you want to make changes to your course, you need to go to [Case

management] – page and click tab ”Your parameter sets”. Then follow these

steps:

1. Click ”Create new simulation parameters” and name it. The parameters

now appear under ”Your parameter sets”

2. Click ”Parameters” and click the box Modules

3. Activate desired feature set

4. Go back to [Case management], choose tab ”Apply parameters to

groups]” and click ”Assign”

Note that you can also change all the other parameters with the same steps

as presented above.

Course Options I

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The course options available through Case Management include:

a. Private customer segment

b. Institutions customer segment

c. SME banking

d. Number of SME credit rating classes

e. Corporate banking

f. Investment services and products

g. Brokerage services

h. Portfolio management services

i. Ability to create new investment fund products

j. Third party investment funds

k. Structured products

l. Systems & Processes operations

Furthermore, the following options are available:

a. Naming of SME credit rating classes, partnership asset managers and

investment fund classes

b. Domestic and foreign currencies

Course Options II

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1. Go to http://www.cesim.com and choose “Register” on the top right.

2. Fill in your email and other details and select the language and the time

zone.

click <next>

3. Enter the course code that is given by your instructor.

click <next>

4. Enter license code if required. (Note that if the license code is required

you must enter a valid code. Otherwise the registration will not continue.)

click <next>

5. Choose your Group and Team. Group equals one world where a

maximum of 12 teams operate.

click <next>

6. Click “Finish” and your registration is almost done.

7. Check your email and click the activation link.

8. Login with your email and password at www.cesim.com.

Student Registration Process

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Flow of Operations

Introduction Practice

Round

Strategy and

Objectives

Decision

making (x 5 – 12)

Conclusion

and Analysis

Decision making with

the web interface

System

calculates

the results automatically

at the given deadline

Results from the

previous round and

market info for the new

round available

Analysis

and

planning

Note that it is not possible to modify the decisions after the round deadline. If the team has not saved its

decisions for a round, the system will automatically use the results of the previous round.

After the introduction, the teams

familiarize themselves with the decision

making process via a practice round.

The results of the practice round will not

have any influence on the actual game

results.

The instructor decides the number of

actual decision making rounds (5-12)

and decision making follows the cycle

on the right.

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The main objective for the teams is to deliver sustainable, profitable

growth. Typically this is measured by a ratio called “cumulative total return to

the shareholders”, which combines share price development and dividends

paid to show the total return to the shareholders.

The instructor may, at his/her discretion, choose to use other criteria to

measure the performance of the teams. For example, market shares, net

interest income, and total income growth can be used if so decided.

We recommend cumulative total return to shareholders due to its

comprehensive nature. The teams may try to manipulate their profits,

revenues, and market share in the short run, but share price will punish any

short sighted decisions sooner rather than later.

Main Objective & Winning Criteria

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Decision making is round based. One decision making round equals one

financial year.

In the beginning of the game, so called ‘initial round results’ are available for

analysis. These can be used as a starting point for the practice round

decisions. After the practice round, the situation is reset back to the initial

state, and decisions will be made for the first round.

Decision making guide and case description should be read before the

practice round. Market outlooks should be read before each round of

decision-making. A new market outlook containing information about the

market development becomes available as soon as the previous round

deadline has passed.

Decision Making Fundamentals I

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Decisions are entered in the white cells. These will be used in the actual

results calculation.

Estimations are entered in the blue cells. These will not affect results

directly, but they are important because together with the decisions they form

the basis for the budgeted results.

Drop-down menus are used in certain decisions where there are some

specific options to choose from.

Decision Making Fundamentals II

Remember to copy the decisions as team decisions before the deadline.

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New challenges

The bank’s operations have expanded from the early days to many new

exciting fields of finance. Retail and small business customers are served on

many fronts and investment services and products have lately been in focus.

The bank has considered other opportunities and ventures as well, and robust

back office operations have been established to support efficient client

processes.

The bank today is not anymore about taking in deposits and lending money to

creditworthy customers but about being a reliable financial adviser and

partner to all customers in all of their financial needs.

Business Case I

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As a response to economic turbulence, new regulations are in process of

being enforced in the banking sector, and this development is expected to

continue some time. Other challenges can be seen in introduction of new

investment services and products and following the key trends to capture the

most value to shareholders, as well as in technology and increasingly

complicated HR affairs. Furthermore, given the recent history of troublesome

lending decisions, the Board is stressing that the bank should carefully assess

growth ambitions against appropriate risk policies.

Your task

The Board has made it clear that misconduct of the past kind is not

acceptable and that the profitability of the bank at the present stage is barely

satisfactory. You are expected to enhance the shareholder value as measured

by the cumulative total shareholder value more than the competing bank’s in

the industry.

Business Case II

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Cesim Bank Overview

Systems & Processes (Technology infrastructure support)

Personnel management (Resources, management, engagement)

Risk management (Controls, reporting)

Treasury (Credit and equity markets, investments, central bank)

Banking and investment

services and products

Retail

Banking and investment

services and products

Private

Investment services and

products

Institutions

SME banking services and

products

SME

Corporate advisory services

Corporate Customers

Front office

Back office

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Summary of Service Offering

Service Retail Private* Institutions* SME* Corporate*

Mortgage loans x x

Other loans x x x

Demand deposits x x x

Fixed term deposits x x

Other bank products x x x

In-house funds* x x x

3rd party funds* x x x

Securities brokerage* x x x

Structured products* x x x

Portfolio management* x x

Advisory* x x

*At course instructor’s discretion through case management

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Banking and multitude of financial services include several elements that are

unlike those found in other commercial activity and as such rudimentary

understanding of these functions is paramount to understanding Cesim Bank

Simulation as these core relationships have been built into the simulation

model.

Credit creation

When banks create new loans to customers, most of the money returns to the

same banks as new deposits, which can then be used to create more

customer loans with only fraction of the amount being held in compliance with

minimum reserve requirements.

Liquidity risk

Bank balance sheet’s typically include significant amounts of long term assets

and short term liabilities resulting in what is known as asset-liability maturity

mismatch. This creates a unique liquidity risk amongst banks that is generally

alleviated with the help of deposit insurance arrangements.

Introduction to banking I

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Solvency risk

Banks typically have very high financial leverage as measured by

commonplace indicators like equity ratio. Bank solvency is measured by

taking into account both the type of capital protecting against losses and the

quality of the assets. Basel III decrees that banks must hold at least 4.5 per

cent of ’common equity tier 1 capital’ against ’risk-weighted assets’ where

CET1 capital refers to common equity and RWA to assets weighted by risk

factors. For example, cash and gold would be assigned a risk factor of 0.

Bank funding

Unlike with most business, with banks, the core customer services, deposits

and loans, form a significant part of the bank’s own funding structure.

Central banking

Commerical banks, unlike other businesses, interface with central banks in

several ways. Bank cash is held as reserves at the central bank, central

bank’s require certain level of minimum reserves and they act as the lender of

last resort to commercial banks if capital markets funding is unavailable.

Introduction to banking II

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Customer facing front office operations include Retail, SME and Corporate

banking as well as Investment services and products offered to Retail, Private

and Institutional customers.

Front office operations consist of:

a. Retail Banking: loans and deposits

b. SME Banking: banking services to SME customers

c. Corporate Banking: corporate advisory transactions

d. Investment Services: brokerage, portfolio management, advisory

a. Investment Products: investment funds, structured products

Front office operations

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Retail Banking is responsible for the bank’s consumer level customers and

their traditional banking service needs

Consumer banking products:

a. Mortgage loans

b. Consumer loans

c. Demand deposits

d. Fixed term deposits

e. Other banking products and services

Loan products (lending)

Teams are able to offer mortgage and consumer loans to both retail and

private customers. Mortgage loans always carry collateral whereas consumer

loans are mixed. Mortgage loans are offered with 1 and 3 year interest

repricing periods with maturities ranging from 15 years to 50 years whereas

consumer loans consist of a mixture of 3 and 5 year loans.

Retail Banking I

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Lending decisions

a. Consumer loan average margin – retail / private

b. Mortgage loan average margin – retail / private, 12 months / 3 years

c. Maximum maturity – 10/15/20/25/30/50 years

d. Expense to income ratio (typically circa 30 per cent)

e. Loan to value ratio (typically circa 65 per cent)

f. Other risk factors (from negligible to paramount)

Loan demand formation

The simulated market has a certain basic demand for loans for each

competing bank. The average interest charges direct customer demand

amongst the competing banks resulting in some level of loan application

demand for each of them. Teams must decide on a set of lending terms

criteria for mortgage loans which is then used to screen the incoming

application flow resulting in a fraction of the original customer demand turning

into granted mortgage loans.

Retail Banking II

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Deposit products (borrowing)

a. Demand deposits – retail / private

b. Fixed term deposits – 12 months / 2 years

Teams must decide on interest paid on the average balance of demand and

fixed term deposits. Demand deposit rates can be set separately for retail and

private customers. Fixed term deposits are offered for 12 months and 2 years,

and the interest remains the same until maturity. The higher the interest

differential in favor of fixed term deposits, the more customer shift funds into

those products.

Other banking products

Retail and private customers are assumed to use a variety of banking

services and products in addition to loans and deposits. These services are

covered with a single pricing decision that ranges from ‘no fees’ to ‘heavy fee

structure’. At every pricing tier the upfront costs are less for the private

segment clients.

Retail Banking III

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SME Banking consists of banking relationship with all business customers

except for the largest enterprises that are considered in Corporate Banking

advisory services

Services and products include deposits, loans and other banking products.

Teams make decisions on deposit interest rate and interest premiums on

loans separately for each credit rating class. SME customers are classified

into separate credit rating classes indicating their overall creditworthiness

ranging from AAA to C, 7 in total, at the broadest setting. Teams are free to

exclude some customers altogether if they so choose.

In addition to the interest rate, other lending terms can be adjusted as well.

These are covered by a single lending terms decision that includes factors

such as personal guarantees, collateral and covenants. The stricter the terms,

the less loans there are but of higher quality.

Competitive factors include pricing, lending terms, depth of service offering

and bank image.

SME Banking (optional)

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Real estate lending

Real estate sector has been separate from the SME customer mass since it is

typically very sensitive to changes in the business cycle. Teams are able to

set lending standards separate for all real estate related lending (excluding

personal mortgage lending).

Competitive positioning

Teams are able to adjust their strategy and competitive position in two ways:

through service offering and sector targeting. Teams may specialize in service

domestic or export sector which leads to increased competence and credit

exposure. Furthermore teams can choose the aggregate level of their product

offering; seeking to serve the needs of all customers requires broad portfolio

but brings with it greatly increased operating costs.

Case management options:

a. Inclusion of the SME module

b. Number of credit rating classes

c. Naming scheme for credit rating classes

SME Banking II (optional)

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Corporate and investment banking business consists of advisory transactions

and general advisory on hourly basis.

There are 3 types of transactions:

a. Mergers & Aqcuisitions

b. Equity Capital Markets

c. Debt Capital Markets

The service capacity is based on Corporate personnel and the remaining

resources are allocated to serving customers on hourly basis on smaller

assignments.

Teams have the option of assigning different priorities to the aforementioned

transactions types in order to gain competitive edge through product

competence and experience. Product prioritization makes the bank allocate

more time for attracting and serving those client needs while reducing the

resources available for other customers. Single prioritization has the largest

effect while prioritizing all products carries no effect.

Corporate Banking I (optional)

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Factors affecting demand:

a. Pricing (percentage based fee on total transaction value and hourly

charge for general advisory)

b. Bank image (bank image is an important factor in relationship driven

business)

c. Product competence (formed overtime based on experience and

specialty prioritization)

d. Product experience (completed transaction backlog, visibility as a

leading bank)

e. Marketing expenditure

f. Employee retention and compensation

Case management options include:

a. Inclusion of the Corporate business line

Corporate Banking II (optional)

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Investment services consists of managing and marketing investment services

to the available customer segments, and acting as a distribution channel for

in-house and third party investment products.

Customer segments include:

a. Retail

b. Private

c. Institutions

Investment services include:

a. Portfolio management (only Private and Institutional clients)

b. Financial advisory (only Private clients)

c. Securities brokerage

d. Sales channel for in-house and third party investment products

The servicing capacity is based on investments personnel where insufficiency

is reflected as poor customer satisfaction and vice versa.

Investment Services I (optional)

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Portfolio management

Portfolio management consists of offering tailored full service wealth

management to private and institutional clients. The teams are not able to

offer this service to their retail customer base.

For both private and institutional clients, the teams should choose finer

segmentation based on the aggregate wealth of the target market’s clients.

Teams may offer their service to the broadest market possible or specialize to

serving the needs to the top-tier clients. The wealthiest clients tend to prefer

more exclusive service providers, although that significantly reduces the

addressable market. Teams must also choose the portfolio management fee

for both segments.

Financial advisory

Financial advisory services can be offered to the bank’s private clients in

conjunction with portfolio management service. Teams have to decide the

hourly charge for the service, and it is recommended to consider the targeted

segment when pricing the service.

Investment Services II

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Securities brokerage

Securities brokerage consists of offering trading services in cash and

derivative instruments in equities and fixed income. These services are

offered to the bank’s entire customer base from retail customers to largest

institutional customers. Pricing is based on monthly base fee, transaction fee

and premium services fee. Private clients do not pay monthly fees, and

institutional customers get even the premium services for free. The wealthier

the client, the more price sensitive they usually are. However, investment

services need to be considered together with the bank’s total offering.

Case management options:

a. Inclusion of the entire business line

b. Private segment

c. Institutions segment

d. Portfolio management

e. Brokerage services

Investment Services III

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Investment products consists of managing and developing investment

products for marketing to the bank’s customer base.

The products include:

a. In-house investment funds

b. Third party investment funds

c. Structured products

In-house investment funds I

In house investment funds consits of three common funds across all

competing banks and the ability to launch up to five (5) new funds as

specified by the teams.

For all funds, teams must decide the asset management fee charged on NAV

or net asset value and whether to outsource the management or not. In the

former case, asset management fee is split between the team’s bank and the

outside manager. Outsourcing option is the most beneficial for exotic funds.

Investment Products I (optional)

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In-house investment funds II

For new funds, teams must specify the desired fund class, sub class and

geographical target market. Options include equity and fixed income funds

with several sub-classes for both, as well as several target markets with all

possible combinations thereof being available. It is most beneficial to launch

funds that have no direct competitors in the market and on the other hand

have strong customer interest indicated.

Third party investment funds

Third party funds consist of up to five (5) possible partner managers, whose

selection of funds can be offered to the bank’s customer base. These

partnerships involve startup costs, and success based fees paid back to the

bank depending on how much capital is attracted to aforementioned funds.

Offering third party funds might weaken demand for the banks own selection

of funds.

Investment Products II

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Structured products

The wealth of options available for investors consists of far more than simple

investment funds and this is reflected in the team’s ability to decide on the

breath of structured product selection ranging from abstaining from the

market completely to broad and innovative offering. Broader offering incurs

more management costs but attracts more customer capital. Importantly,

some of these products put the bank’s own capital at risk and as such more

robust risk management controls are recommended.

Case management options:

a. Inclusion of investment products

b. Ability to launch new investment funds

c. Third party investment funds

d. Structured products

Investment Products III

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In addition to client facing front office operations, the Cesim Bank Simulation

covers a range of supporting back office operations.

Back office operations consist of:

a. Personnel Management: sufficiency of personnel

b. Systems & Processes: investment into infrastructure

c. Risk Management: risk management

a. Treasury: credit and equity markets, treasury investments, central bank

Back Office Operations

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The personnel management function consists of managing the sufficiency

of sales and support personnel in all the bank’s departments including

retail, sme, corporate, investments and back office (including management)

and determining appropriate personnel policies related to compensation,

training and engagement.

Hiring / Layoffs

Teams need to hire employees to each of the bank’s department according to

customer service needs and marketing intentions. Teams choose the number

of people they will have in each department for each round. Any additional

hiring or redundancies take place immediately and the desired number of

employees is always available. Certain fraction of people, indicated by the

turnover percentage, leave the bank each period without any associated

redundancy costs whereas hiring and layoffs do incur additional personnel

costs.

Personnel Management I

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Sales & Support resources

Immediate customer service and support needs require certain level of

minimum resources. In addition to this time is consumed in various

miscellaneous activities such as personnel engagement, training etc.

Importantly, the resources in excess of aforementioned requirements are

spent in various value adding activities such as customer prospecting,

relationship management and internal development, depending on the

department.

Personnel policies:

Personnel policies include compensation, training and HR development.

Compensation includes decisions for basic compensation as well as incentive

pay in either pre-set profitability based or freely set profit share based.

Training is administered by choosing the level of funds and priority areas,

which can be used to target problem spots or key concerns. HR development

policies allow the teams to decide how important personnel management is to

their bank’s goal. While it requires more time and money in the short term, it

yields lasting benefits over the long term.

Personnel Management II

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Investment options include:

a. Internet banking services

b. Banking product development

c. Customer service processes and experience

The more you invest the higher quality results you will achieve. However,

decreasing marginal benefits apply. Higher levels of competence lead to

higher demand across the bank’s services and products.

Systems development

Systems development deals with the bank’s basic IT infrastructure and

systems. The development decision is made for the pace of adoption of new

technology. Tech bellwethers are fastest at adopting the latest technology

innovations but have to pay the highest cost for them. Laggards concentrate

on observing others and only adopt proven solutions that yield the most

benefits once the costs have come down. Higher levels of competence and

technology leadership bring down operating costs and reduce operational

risks.

Systems & Processes

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The risk management function deals with risk identification, quantification and

prioritization and insituting proper controls, policies and reporting of the

aforementioned issues within the bank.

Risk management policies

Teams must make policy decisions regarding internal risk management

controls and external risk reporting. Internal risk management policy deals

with recognizing, quantifying, prioritizing and communicating risks within the

bank. More rigorous processes increase costs but reduce the likelihood of

mishaps in most bank operations.

External risk reporting policies deal with communicating the bank’s risk status

to outside interest parties such as regulators, debt and equity investors and

the general public. Transparent and extensive reporting promotes good bank

image and yields a multitude of subtle benefits across the organization.

Risk Management I

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Interest rate risk management

A core risk management issue in banking is the interest rate risk that

emanates from asset-liability mismatch in interest rate sensitive assets and

liabilities. For example, if a bank has twice as many assets with a one year

repricing period as it has liabilities, a decrease in interest rate has a negative

impact on the bank’s cash flows, and vice versa. This risk can be hedged by

derivative instruments, and the decision is made by choosing the degree of

hedging.

Core risk factors in banking

a. Credit risk

b. Interest rate risk

c. Liquidity risk

d. Solvency risk

e. FX risk

f. Market risk

g. Operational risk

Risk Management II

42

Bank regulatory issues typically fall under structure, solvency and liquidity.

In Cesim Bank Simulation we have included:

a. Central bank minimum reserve requirements

b. BASEL III based solvency requirements

The central bank in the simulation requires the competing banks to deposit a

certain fraction of their short term liabilities with the central bank at the end of

each period to adhere to minimum requirements.

According to Basel III solvency requirements, banks must hold certain

fractions of their risk weighted assets as Common Equity Tier 1 capital, Tier

1 capital and Total capital. Furthermore, profit distribution is limited by an

additional conservation margin. These concepts have been built into the

Cesim Bank Simulation.

Bank Regulatory Issues

43

Bank balance sheet and funding

In banking the customer-facing product and sales decisions, borrowing and

lending, form a core part of the funding of the enterprise and management of

the balance sheet.

Bank Treasury I

0

10

20

30

40

50

60

70

80

90

Assets Liabilities

Assets

Cash and reserves

Investment assets

Business loans

Consumer loans

Mortgage loans

Tangible assets

Intangible assets

Liabilities

Central bank

Demand deposits

Fixed term deposits

Bonds

Subordinated debt

Equity

Bank funding is divided into

core deposits (demand and

fixed term) and managed

liabilities (interbank, capital

markets, central bank). Equity

typically covers a very small

fraction of funding needs.

Assets tend to be very long-

term (mortgages) while liabilities

(demand deposit) are short term giving

rise to significant liquidity risk

44

The goal of the financing decisions is to minimize the cost of funding to the

bank and to return capital to the equity holders. Decisions that are available

include:

a. New senior and subordinate bond issue

b. Share issue and repurchase

c. Dividend payment

d. Treasury investments

Credit markets

Banks can raise long term debt financing from capital markets by issuing

either a) new senior bonds or b) new subordinate bonds. Both debt

instruments have a five year maturity and a fixed interest rate. The interest

rate is based on the bank’s public credit rating.

Senior bonds rank higher in the bank’s capital structure, but subordinate

bonds can be counted against regulatory requirements on total capital,

because they are included in Tier 2 capital.

Bank Treasury II

45

Equity Markets

Financing

New shares can be issued to raise equity financing. Solvency regulations

decree a certain level of regulatory capital to be sustained at all times. The

issue price is based on market valuation at the beginning of the round, and

the number of shares issued affects the issue price linearly.

Profit distribution

Dividend payments and share repurchase can be used to return earnings to

the shareholders, assuming the company has retained its earnings and

conforms to solvency regulations including the capital conservation buffer.

The repurchase price is based on market valuation at the beginning of the

round, and the size of the repurchase affects the issue price linearly.

Bank Treasury III

46

Treasury investments

The teams can manage the bank’s balance sheet by investing certain fraction

of the bank’s assets into domestic or foreign treasury bonds. These carry

higher risk and return expectations than deposits with the central bank. In

addition, foreign bonds incur FX risk.

Central bank operations

The lender of the last resort in the Cesim Bank simulation is a central bank.

This means that all emerging funding gaps are covered by automatically

taking short term loans from the central bank. The central bank funding is two-

tiered; there is a limited amount of funding available through the credit facility,

but needs in excess of this are covered from the emergency funding program

that carries a higher interest rate.

The central bank also required certain amount of minimum reserves to be

deposited with it at all times. In addition excess cash funds are held with the

central bank as excess reserves in the deposit facility.

Bank Treasury IV

47

Projections

Projections can be launched from the bottom of the page and they consist of income

statement, balance sheet, segment based income statement and loan book. In

addition, projections include key parameters for current and previous periods.

Current round figures update continuously as decisions are made. Actualized figures

for the previous round are shown on the right.

48

Net interest margin, % = Net interest income / Interest income

Indicates the bank’s ability to generate value from its core operations, borrowing and

lending. Calculated as interest income less interest cost divided by interest income. All

balance sheet items that generate interest income or costs are taken into account.

Cost / Income ratio = Total non-interest costs / Total income

Indicates the bank ability to cover it operational costs with the income from its operations.

Calculated as total non-interest costs divided by total income.

Common Equity Tier 1 ratio, % = CET1 capital / Total risk weighted assets

Indicates the bank’s financial leverage and solvency risk by taking into consideration

amount and type of capital as well as riskiness of assets on balance sheet as required by

regulatory standards. CET1 includes

Tier 1 ratio, % = CET1 + Other Tier 1 capital / Total risk weighted assets

Indicates the bank’s financial leverage and solvency risk by taking into consideration

amount and type of capital as well as riskiness of assets on balance sheet as required by

regulatory standards.

Bank Specific Financial Ratios I

49

Total Capital ratio, % = Tier 1 + Tier 2 Capital (subordinated debt) / Total risk

weighted assets

Indicates the bank’s financial leverage and solvency risk by taking into consideration

amount and type of capital as well as riskiness of assets on balance sheet as required by

regulatory standards.

Risk weighted assets = All assets on balance sheet weighted with individual risk

factors

Risk weighted assets calculation standardizes the risk inherent in the different balance

sheet items on the bank’s balance sheet. This is required to better understand the

amount of capital that should be held against bank’s total assets, because the risk

associated with for example central bank reservers, gold, long-term customer loans,

treasury bonds and real estate is very different.

Rate sensitive assets and liabilities

Rate sensitive assets and liabilities refer to balance sheet items that are based on

adjustable interest rates and whose cash flows can change over time.

Bank Specific Financial Ratios II

50

Profit before taxes, % = Profit before taxes / Total income

Indicates the bank’s ability to generate profits from its operations. Profit before taxes is

calculated after customer credit impairments.

Net margin, % = Profit for the period / Total income

Indicates the bank’s ability to generate profits for the shareholders from its operations.

Calculated as profit for the period divided by total income.

Return on equity, ROE % = Profit for the period / Average shareholders’ equity

Indicates the return that the bank earns to its shareholders.

Return on assets (ROA) % = Earning before interest and taxes / Average Total

assets

Indicates the bank’s ability to generate returns with all of its assets.

Equity ratio = Total Shareholder’s equity / Total assets

Indicates the bank’s financial leverage, i.e., what proportion of assets are financed with

common equity.

Key Financial Ratios I

51

Key Financial Ratios II

EPS (Earnings per share) = Profit for the period / Number of shares outstanding

Dividend yield-% = Dividend per share / Share price

Indicates the annual percentage of return that the current level of dividend provides to

the investor, as compared to the current share price

P/E = Market value per share / EPS

P/E indicates how many years it takes with the current level of earnings to pay the price

of one share. High P/E ratio usually implies high growth expectations and vice versa.

P/B = Market capitalization / Shareholders’ equity

Indicates the financial markets’ perception of the true value of the bank’s equity

compared to its book value.

Cumulative total shareholder return, % (winning criteria)

1%100

1 periodthis

priceshareperiodinitial

shareperdividendscumulativepricesharecurrent

The concept of total shareholder return is explained on the next slide

52

Cumulative Total Shareholder Return is the average annualized

percentage return that a company delivers to its shareholders during the

whole simulation. It takes into account the changes in the company’s

share price and cumulative dividend payments.

Example:

1. No dividends. Let’s say that the share price in the beginning of the

game is 10EUR, and after one round (=year) the share price is

12EUR. This gives 20% return to shareholders for that given year.

2. With dividends. In addition to the above, the company pays a 1EUR

dividend per share during the round. Total return is (12+1)/10 = 30%

In the previous we assumed that the change happened over one round.

The same principle applies for multiple rounds. In that case we add

cumulative dividends to the share price and annualize the return. For

example, 30% cumulative return over three years would be 9%

annualized return on average.

Cumulative Total Shareholder

Return % p.a.

53

Decision Checklist

On the decision checklist page all team members’ decisions can be seen side by

side. By pressing ’copy’ a team member’s decisions are moved to the team decision

column. At the deadline, the system reads the decisions from the team decision

column and calculates results for the round.

Team decisions can be accessed and consequently edited directly by pressing ’go’ in

the team column.

Note that previous round decisions will be used if there are no saved decisions for

the round.

Also historical decisions for any team member can be accessed by choosing the

respective round from the dropdown menu.

54

After each round the system generates reports that depict the results of each

team in a particular market.

Results consist of:

a. Summary report with a set of charts

b. Business line reports for Retail, SME and Corporate banking, and

Financial services and products

c. Back office reports for Personnel, Systems and Risk management

d. Financial statements; including an income statement with a

separate statement of comprehensive income and a balance sheet

e. Financial ratios; including share price info and key financial

indicators

f. Banking sector report portraying the development of the industry

Results provide useful information about a team’s own sales, operations, and

finances. In addition, results can be used to benchmark performance with the

competing teams in the same market.

Results I

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Analyzers

Some results reports include additional information only available in the

Instructor Results view. We call these analyzers, and they typically offer more

insight into the formation of results by for example detailing result item

subcomponents etc.

Results II

56

Cesim

Arkadiankatu 21 A

00100 Helsinki, Finland

Tel. +358 9 406 660

www.cesim.com

contact@cesim.com

Technical Support

support@cesim.com

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