ProBanker Simulation Game

Which of your bank decisions worked out well?

It was the first of rounds; it was the best of rounds. Round One saw the bank raise the interest rate on fixed-rate corporate loans from 9.3% to 12.5%, the interest rate spread rose from 4% to 6% on floating-rate corporate loans, and mortgage rates had a 200 basis point bump to 11%. The raising of interest rates across assets, acceptance of a lower credit quality in borrowers, and larger advertising budgets caused a 34.66% increase in stock performance. Net income rose from $552.11 to $1,031.81. The loan loss percent also increased from 0.2494% to 0.2914%, this increase largely made sense as it corresponded with the lower credit quality.

Looking deeper than this, our decision had dramatically altered our balance sheet. The $130,675 of floating rate corporate loans that matured in the next quarter was replaced by $49,964 maturing in two quarters. This represents an astounding 43% drop in revenue. Fixed-rate corporate loans also plummeted from $99,452 to $18,309.04. This caused a 75% drop in revenue.

These drops in revenue hardly seem like a recipe for success. The revenues for the firm actually dropped by about $1,300. Revenues of course only tell one side of the story. The competitive advantage of the bank was the dramatic reduction of expenses. This was largely achieved through the elimination of discount window advances, which cut costs by $1,741.31. Other expenses trended up and down with a net negative effect that caused the dramatic increase in net income.

To be frank, the bank did not fully understand the forces at play that caused this to be a successful round while going through the simulation. The successful increase of net income and the price per share lulled the bank into complacency. This leads into some of the most damaging bank decisions.

Which of your bank decisions hurt your performance?  How did you change your decisions in response to performance declines?

Round Two was the worst set of bank decisions that we made as a group. Because of the success that we had in Round One with net income, we felt that we only needed to make slight changes. The changes that we made were focused on bringing our GAP closer to zero to help immunize against interest rate changes. The second change that was made was to lower the amount of excess reserves to within 10% of the required amount.

Ironically, nothing went to plan. Excess Reserves rose to $13,503.65 or about 70% more than the required amount. Net income tanked from $1,031.81 down to $374.84. This falls below even the original net income of $552.11. The effect of the drop in loans for the floating-rate corporate loans was fully felt as $132,571.74 that matured was replaced at the amount of $50,513.37. In Round Two, there were two periods of mortgage loans that had dropped by more than 50%. This kind of deterioration of assets was significantly hurting the bank’s ability to maintain the prior level of profitability. In short, the decisions that we made were simply disastrous.

In the aftermath, the bank was aware that retail demand deposits and corporate demand deposits dropped by $90,039.80 and $9,065.20, respectively. To the group, this was the primary concern and focal point of the ensuing discussions. This led to an increase in spending on advertising to attempt to attract these deposits back again. This included an increase in advertising by 33% for corporate demand deposits, 36% for retail demand deposits and 50% for savings.

The changed decisions improved performance slightly, but failed to surpass our starting net income level. Retail and corporate demand deposits for example, skyrocketed by a combined $130,000. The problem is that this failed to solve the underlying issues that we faced with the radical drop in loans issued.

Question: What would you do differently if you played the game again?

Recommendation from peer: Lower most of the loan rates because we ended up sacrificing huge amounts of interest by capturing the fed funds rate instead of the floating rate.