New Banking System

Banking and Finance DLC for Capitalism Lab
amangupta999
Posts: 4
Joined: Mon Jan 26, 2015 4:08 am

New Banking System

Post by amangupta999 »

What I am proposing is one of the methods of :
I.

The First method involves simply borrowing as much money as you want and interest and only when people buy them do you get the money, essentially letting the market decide the credibility of the business in question.

II.

This method involves getting the money instantly by going up to business that offers "underwriting" services the ability to negotiate with you to issue bonds over the interest rate,and the total principal of the issue. Then they negotiate involving the amount of fees they will receive, afterwards they have the option to sell the bonds to the market with a lower interest rate as a way of making profit.

Example of deal progression:
I.

Company A asks for $1 billion,5% -> Issues on market -> Company B Buys $5 mil worth of bonds - ----- Now Company A bonds worth $95 mil are left and Company A receives the $5 million

II.

Company A asks for $1 billion,1% underwriting from Company I -> I refuses and offers them $1 billion 5% -> Company A agrees and receives the 1 billion and begins paying interest -> Company I now issues the bonds at a rate of 2% on the market and every year takes the gap of 3% for the bonds

There is also a portion that involves consumers and the creation of a consumer banking system by companies. How it works is that consumers can deposit or borrow money from a bank which can only move a certain amount of Savings and Loans a day. Now you can as a global setting adjust how much money you are allowing to have in maximum deposits and maximum loans. As competition increases consumers will move the the better bank. In the economy graphs section there will have to be 2 new graphs which represent average per capita savings, and borrowing capacity. These values are heavily connected to the economy and unemployment rate. Then in order to balance it out the consumers will also have a interest rate threshold so that if Inflation>Savings Interest then they will only deposit 50% of what they should and something similar for Central Bank Rate and Borrowing rate. People can also default on their loan based on economic position,GDP growth,unemployment rate and maybe average wage. Then we can have it so that the loans get filtered into multiple categories that have a different probability of paying back by using a ranking system using a system of "1 - 100". where 1 is the least stable but highest interest rate and then you can determine how much of each type of loan to give to manage risk better. Then there also could be selling loans to other people like they do with mortgages nowadays to make money for more of them.

Then we would also need a way for bank to make money using fractional-reserves. What this means is that if you have $10 mil in deposits and the ratio is 1:5 you can lend out $500 mil. You can set the max ratio at the start and then you can adjust the rate for your own bank.
Summary:
Enterprise
Bond System - Either Issue bonds yourselves and wait for people to buy them to get the money, or have it underwritten for a fee by another corporation
Consumer Banking - Ability to have banks that you can then adjust the amount of interest people get for depositing or pay for a loan; able to control how much in savings and debt you have
Last edited by amangupta999 on Wed Mar 18, 2015 3:01 am, edited 3 times in total.
counting
Level 8 user
Posts: 843
Joined: Wed Jan 29, 2014 12:44 am
Been thanked: 1 time

Re: New Banking System

Post by counting »

amangupta999 wrote:What I am proposing is one of the methods of :
I.

The First method involves simply issuing as much money as you want and interest and only when people buy them do you get the money, essentially letting the market decide the credibility of the business in question.
This start of this sentence should be "The first method involves simply issuing as many bonds as ...", bond is the financial product being offered.

The secondary market consist of underwriting actions is interesting, but it's based on contract, thus imply offer and counter offer, I wonder what's the formula or threshold AI would set in order to facilitate the creation of contracts.

The money creation process in savings bank and commercial bank is crucial in setting market interest rate, and affect inflation, the linking between "saving" from "citizens" and "loan creation" to provide the basic financial service would need not necessarily complex, but more detail mechanics for it to function properly.
-------------------------------------------------------------------
Twitch channel : twitch.tv/ancientbuilder
Youtube channel : www.youtube.com/user/countingtls
-------------------------------------------------------------------
amangupta999
Posts: 4
Joined: Mon Jan 26, 2015 4:08 am

Re: New Banking System

Post by amangupta999 »

counting wrote:
amangupta999 wrote:What I am proposing is one of the methods of :
I.

The First method involves simply issuing as much money as you want and interest and only when people buy them do you get the money, essentially letting the market decide the credibility of the business in question.
This start of this sentence should be "The first method involves simply issuing as many bonds as ...", bond is the financial product being offered.

The secondary market consist of underwriting actions is interesting, but it's based on contract, thus imply offer and counter offer, I wonder what's the formula or threshold AI would set in order to facilitate the creation of contracts.

The money creation process in savings bank and commercial bank is crucial in setting market interest rate, and affect inflation, the linking between "saving" from "citizens" and "loan creation" to provide the basic financial service would need not necessarily complex, but more detail mechanics for it to function properly.
By the way, thanks for adding the suggestion and fixing my grammar typed it up late at night only time I had the time to type it.
I made the changes however adding in fractional reserve banking and a way to sell debt given to consumers, and managing risk levels.
counting
Level 8 user
Posts: 843
Joined: Wed Jan 29, 2014 12:44 am
Been thanked: 1 time

Re: New Banking System

Post by counting »

Actually if you think about the "corporate bonds" like a normal product, and the "selling price" of the bonds from a corporation is the "interest rate". The underwriting agency are "buying" this bonds product as a lower "price" (higher interest rate), and reselling at a higher "price" to the public (lower interest rate), thus gaining a "price difference" like a "retail store".

The differences between this "financial product" and "normal product", are the links between "sellers" and "buyers" are not separated after "purchase", but with constant flow of "interest payments" over time, and the "interest rate" is conceptually in reverse to the "price". You need to buy "high" (interest payment bond) and sell "low" (interest payment bond).

Another way of looking at this, is that "money" can be considered a kind of product as well. On the instance of "savings bank", their "raw materials" are the large body of citizens' savings, and savings banks purchasing money at a lower interest rate (savings interest), than "manufacturing" them into "loans", and usually it's the corporation purchasing these "loans" with a higher interest rate, thus banks gain the difference as "revenue" in return, but sometimes banks also sell "loans" back to the public, like mortgages.

On this light, you can also consider underwriting agencies more like a type of "commercial banks", but their "raw materials" are companies with extra cash looking for investments, thus agencies "buy" money from them with "low-interest-rate bonds", and then "sell" the money toward corporations who issue bonds at a higher interest rate. In a way, these agencies are like factories who "repackaging" money.

Generally speaking, financial system is a circular system of money that can pump accumulated capital toward where it is needed, at the same time providing the foundation of transactions.

For the most part, you can think of financial product like a slightly different "production system", which it's buying/selling money via the medium of securities(financial terms like bonds, and loans, even insurences). Thus these securities are assets for banks, and deposits from clients are liability in their balance sheets.
-------------------------------------------------------------------
Twitch channel : twitch.tv/ancientbuilder
Youtube channel : www.youtube.com/user/countingtls
-------------------------------------------------------------------
User avatar
David
Community and Marketing Manager at Enlight
Posts: 9414
Joined: Sat Jul 03, 2010 1:42 pm
Has thanked: 13 times
Been thanked: 35 times

Re: New Banking System

Post by David »

The suggestions on this thread are noteworthy and we are currently evaluating the feasibility of implementing some of them in one way or another for the new City sim expansion pack. (Thus, I have moved this thread to the city sim expansion pack forum and keep a link in the original forum.)
There is also a portion that involves consumers and the creation of a consumer banking system by companies. How it works is that consumers can deposit or borrow money from a bank which can only move a certain amount of Savings and Loans a day. Now you can as a global setting adjust how much money you are allowing to have in maximum deposits and maximum loans. As competition increases consumers will move the the better bank.
This will require the introduction of two new types of bank buildings in the game, which can be built by the player:
1) Bank Headquarters
2) Bank Branch Offices (or should it be called Bank Retail Branch?)

The player will have to build a network of branch offices for reaching customers located in different regions of the city.
A urban location with a denser population will have a higher land cost but also offers the benefit of a larger potential client base.

Concerning the interface of a bank branch office, we think the following types of data should be presented to the player.

Total number of clients
Each bank branch office acquires customers gradually over time.
When the area’s population increases, thanks to completion of new apartments, commercial buildings in the area, the bank will benefit from being able to acquire more customers.

Total client deposits
Existing clients may deposit more money into your bank as they become more wealthy.
In other words, when the GDP growth of the city becomes stronger, client deposits will increase in amounts as a result.

Saving Account Interest Rate
It follows the interest rate set by the central bank.
But you can increase it up to 1% to make it more attractive to people.

Time Deposit Interest Rate
1 year time deposit

Time deposit accounts should offer a high interest rate than ordinary saving accounts.
It follows the interest rate set by the central bank.
As the owner of a commercial bank, you can increase it up to 1% higher than the standard rate to attract new deposits from customers.
Basically, setting your bank's deposit interest rate higher will increase your competitiveness against other bank competitors. But it does come up with a price (lower profit margin).

On a related note, to keep it simple, we will only have 1 year time deposit. Fixed deposits for other time periods will not be present in the game.


Market Share
It can be a pie chart showing the % of people who are customers of your bank, and those who uses AI competitors’s banks, and the local banks (gray color).

It has 2 market share pie charts:
1) market share of total amount of deposits.
2) market share of mortgage

Attached is a rough mock-up of the interface. There is obviously room for discussion about how the interface should look like and how the gameplay mechanism of the retail banking system should work. We are at an very early stage of game design for a new banking system and any inputs are welcome.

We will also respond to other suggestions on this thread later, when we have come up with more game design details for this potentially new banking system.
Attachments
bank branch office.jpg
bank branch office.jpg (66.89 KiB) Viewed 8625 times
counting
Level 8 user
Posts: 843
Joined: Wed Jan 29, 2014 12:44 am
Been thanked: 1 time

Re: New Banking System

Post by counting »

David wrote: Market Share
It can be a pie chart showing the % of people who are customers of your bank, and those who uses AI competitors’s banks, and the local banks (gray color).

It has 2 market share pie charts:
1) market share of total amount of deposits.
2) market share of mortgage
Most designs in this proposal seem solid, I only have a couple of question.

1) Isn't it supposed to have 2 pie charts? One for "customers" of deposit, and one for "loans"

2) What would fractional reserve mechanics functioned in game? (it could work with any type and ratio, since it's just numbers in game and don't need to be shown, but there are still differences based on different underline concepts, and especially effecting liquidity, as well as the expansion of a newly formed bank "corporation") And this question leads to the import question of how would "mortgage" competition work? And AI clients (not local gray citizens) even human players should theoretically be able take loans and deposit their cash into the bank, at least person's wealth(CEO are citizens as well). And if so, then it will be possible for an individual to take a loan from one bank, and deposit it to a different bank, providing that it's deposit interest are greater than the mortgage interest.

3) Loans are the means for banks to acquire profit, but also there are other means for them to "invest" in other lucrative deals, hence the concept of "investment banks", and a lot of them in real world doesn't actually partake in actual mortgage businesses at all. And for commercial banks, corporation bonds or government bonds are some of their investment package, and there are some restriction for how banks can invest in real world, since banking system is supposed to provide a mean for capital to be recycled to needed area, and government wish to them to be certain area, (or shouldn't be certain area, like all going to housing district, and creating a housing bubble again, etc). So this also bare the question of whether the banking mechanism be engraved with actual money supply/demand mechanism as well as economic cycle and inflation/deflation? Personally I think it should be implemented, but a lot of works need to be put into it for them to function as a whole without creating too many loopholes. (Believe me, there will, even in real world financial system, there are enormous amount of regulations towards financial agencies even just in the early days when modern banking system were formed)
Last edited by counting on Wed Mar 25, 2015 6:36 am, edited 1 time in total.
-------------------------------------------------------------------
Twitch channel : twitch.tv/ancientbuilder
Youtube channel : www.youtube.com/user/countingtls
-------------------------------------------------------------------
counting
Level 8 user
Posts: 843
Joined: Wed Jan 29, 2014 12:44 am
Been thanked: 1 time

Re: New Banking System

Post by counting »

There are lots of academic studies investigate the actual effect of bank competitions in real world, since we are almost a century beyond what most modern banking mechanism been established, Lots of data can be analyzed, even automatically scanned into computers from decades to a century old meaningful real world data with the increasing computation powers researchers able to use. Many arguments in economic theories can finally be put to the test, and see what really going on instead of just mathematical models, and the results from these experimental and computational economics investigations are quite interesting indeed. Like what we know about banking competitions in theory are surprisingly not quite what we expected compare to real world data. And the law maker in the past couldn't have know what their policies and regulations could cause, and now we know why they are wrong in retrospect (although sometimes the theorists did get their theories right, but most of them are quite limited within certain conditions).

One example is interesting. Would more competitions of banks (more concentrated) be helpful for local businesses to acquire capital they needed? It's a wildly debated topic even in academic and for real financial policy makers (governments). Should they encourage more financial agencies with less regulations, or should they save banks when they fell? And how many frictions doesn't the financial institutes actually caused (since some part of the resources going into financial sectors, means some actual growth are diverted away from it, would financial institutions become too fat for their benefit provided toward the overall economy)? The answers are more complicated than people would though.

From old data or relatively new data (like banking records from Philippines in 2000s[1], instead of records from early 1900s in England[2]), the answers are quite complex, not a yes or no. Supposedly when there are more banks in a region, means the cost of borrowing should drop down, hence more capital flow through and everyone is happy. Some studies do support this classic thinking and results are positively correlated between the concentration of banks and capital availability. But interestingly some studies suggest the opposite when conditions are different. When there are too many different banks (different banks' branches) existed in a small region, due to they all become relatively small, hence less likely to provide large sum of loans, and less able to absorb risks, hence can only provide loans selectively to less risky targets, and as a result hinders entrepreneurship (since new businesses are usually with the highest risk). In this light, too many banks just create too much "overheads", results in stagnation of local economy, or even regional credit crisis and forcing desperate borrowers seeking alternative capital funding channels[3]. Then what is the good ratio of bank concentration[4]? And did international giant bank consortium in oligopoly or oligopsony as we are familiar with today, the nature evolution result over time and the best option we can get[5]? Also how about giant monopoly without competition at all?

Studies have shown [6][7][8][9][10] and from what we have experienced in the recent Great Recession (and almost a century earlier the Great Depression), big banks are very likely interconnected with the downfall of the entire economy. Although they seemed stable for decades, but the accumulative structural complexity within them with their sheer sizes, causing not only diseconomies of scale, but also a crisis due to one of them is just so big, once failed, the entire economy felt the shock (the too big to fail policy many politicians and governments advocated and stood by[11][12]). And these crisis seemed to happen more often than we would like them to be (not just great crisis, but smaller ones seems to pop-up every decades or so). And it became a real tsunami when interconnectivity between banking institutions increases (i.e. globalization of financial system). One domino fell, it spread toward every sectors and every corner, not just within financial system itself (since financial system should supposedly absorb the shock, and many times in smaller crisis it did. Also be aware of that the economic cycle with regularity, is an entirely different phenomena and related to all kinds of different issues, although one of them is the friction in financial system).

All in all, although banking is just a portion of the financial system, still one of the oldest and served crucial function in our daily lives of economy activities. It needs not to be perfect (and honestly I don't think it ever will), but we could try to use the advantages it provides and choose to minimize the trouble it might cause. This is also true even in designing banks as game mechanics. Will the inclusion of banking feature helps players, or would it creates too many loopholes and ruin the fun? (not necessary needs to maintain a "healthy" in-game economy, and sometimes the opposite is more favorable, since facing crisis makes interesting and challenges games if designers choose to impose it). The real questions are : Could the benefit of a more intrinsic financial mechanism make the game stable enough and providing capitals for entrepreneurs (after all it's all players start from) in Capitalism games? We wouldn't like a mechanism that can crash the entire economy in every decade (like the issue of old Cap II AIs sometimes causing all of them failed after a decade without intervention). Also would players' action in banking take away the fun or creating more fun? If allowing corporations partake in banks as well as manufacturing sectors, what would happen if players use deposit gathered from citizen to invest manufacturing instead of providing mortgage? Or creating interbank loans and at a higher level creating systematic failures like the ones in real life[10]? If no serious in-game rules/regulations to impose certain restrictions, it would seems to be a very powerful boost for human players to gather capital (there's nothing wrong about it, but could make games become too easy, even nearly loophole exploits). However if banks are dial down to be less lucrative, then the incentive for humans or AIs to invest in bank businesses will drop. Thus the balance of mechanic needs to be planned carefully, or use game options/settings that can be tuned, even turn on/off (or like in real life, prohibit certain investments and activities for financial institutes).

Finally I'd like to say I stand by my opinion - a financial mechanism implemented well is very important for Capitalism game, not only could it provide solid foundation toward other sectors, but also make the Capitalism game worthy the name of Capitalism. We shouldn't let it slide just because it is complex and seemed hard to tackle.

[1] TACNENG, Ruth. "Local Banking Market Structure and SME financing obstacles: Evidence from the Philippines."
[2] Braggion, Fabio, Narly Dwarkasing, and Lyndon Moore. "The Economic Impact of a Banking Oligopoly: Britain at the turn of the 20th century." (2014).
[3] Nicola Cetorelli, Pietro F. Peretto, Credit quantity and credit quality: Bank competition and capital accumulation, Journal of Economic Theory, Volume 147, Issue 3, May 2012, Pages 967-998
[4] Vives, Xavier, Competition and Stability in Banking (May 2010). CESifo Working Paper Series No. 3050.
[5] Cetorelli, Nicola, and Pietro F. Peretto. "Oligopoly banking and capital accumulation." (2000).
[6] Allen N. Berger, Christa H.S. Bouwman, How does capital affect bank performance during financial crises?, Journal of Financial Economics, Volume 109, Issue 1, July 2013, Pages 146-176
[7] Angelides, Phil, and Bill Thomas. The financial crisis inquiry report: Final report of the national commission on the causes of the financial and economic crisis in the united states (revised corrected copy). Government Printing Office, 2011.
[8] Wenling Lu, David A. Whidbee, Bank structure and failure during the financial crisis, Journal of Financial Economic Policy 2013 5:3 , 281-299
[9] Torna, Gokhan and DeYoung, Robert, Nontraditional Banking Activities and Bank Failures During the Financial Crisis (March 31, 2012).
[10] Haldane, Andrew G., and Robert M. May. "Systemic risk in banking ecosystems." Nature 469.7330 (2011): 351-355. This is a quite important paper, and a good lesson can be learn especially for Capitalism game, since balance sheet is a must and core part of the game, banks included.
[11] Xin Huang, Hao Zhou, Haibin Zhu, Assessing the systemic risk of a heterogeneous portfolio of banks during the recent financial crisis, Journal of Financial Stability, Volume 8, Issue 3, September 2012, Pages 193-205
[12] Peter Klimek, Sebastian Poledna, J. Doyne Farmer, Stefan Thurner, To bail-out or to bail-in? Answers from an agent-based model, Journal of Economic Dynamics and Control, Volume 50, January 2015, Pages 144-154

Appendix
http://arxiv.org/abs/1501.00434 Economic simulation models might shed some light about what computational model could predict and function. Along with [12], shows some very fundamental structure can be implemented as in game. The dynamics of the leverage cycle The interaction and activities simulation of banks invest in stock markets, could be very insightful if wishing to integrate financial focused corporations with existing stock market mechanics, and the possible emerging phenomena of economic cycle based on this foundation, and with some restrain in policies/rules to make a more stabilized balance.
banks model.JPG
banks model.JPG (107.57 KiB) Viewed 8614 times
-------------------------------------------------------------------
Twitch channel : twitch.tv/ancientbuilder
Youtube channel : www.youtube.com/user/countingtls
-------------------------------------------------------------------
User avatar
David
Community and Marketing Manager at Enlight
Posts: 9414
Joined: Sat Jul 03, 2010 1:42 pm
Has thanked: 13 times
Been thanked: 35 times

Re: New Banking System

Post by David »

1) Isn't it supposed to have 2 pie charts? One for "customers" of deposit, and one for "loans"
These are in fact presented in the Bank Headquarters interface. Please see the below pages with interface drafts for it.

And here are some additional notes about the interface showing the Loans details:

Types of Loans
For simplicity, there are only 3 types of loans in the game:
1) Mortgage (low risk)
2) loans to corporations, which include the player corporation and the AI controlled corporations in the game. (moderate risk)
3) loans to small businesses, which are local businesses in the game. (high risk)

Loan collaterals
For simplicity, the values of collaterals for loans to small business are universally assumed to be 30% of the loan amounts. When a loan default occurs (usually the business went bankrupt), the bank will get back 30% of the loan amounts.

The collaterals for mortgages are the properties. The bank will become the owner of the property and may put it on market for sale.

For when a corporation defaults on its loan and goes bankrupt, the lending bank may be able to recoup part of the loan after the sale of the corporation’s remaining assets.

Loan default rates
The default rates of loans to small businesses are affected by:
- The GDP growth rate which reflects the economic position of the city (whether it is prosperous or in a recession)

The default rates of mortgage are affected by:
- The unemployment rate

Any feedback is welcome.
Attachments
Bank HQ 3.jpg
Bank HQ 3.jpg (58.45 KiB) Viewed 8598 times
bank HQ 2.jpg
bank HQ 2.jpg (52.13 KiB) Viewed 8598 times
bank HQ 1.jpg
bank HQ 1.jpg (74.42 KiB) Viewed 8598 times
counting
Level 8 user
Posts: 843
Joined: Wed Jan 29, 2014 12:44 am
Been thanked: 1 time

Re: New Banking System

Post by counting »

Some thoughts

1) Any branch office will only shown its own deposit and loan amount within its own region coverage?

2) Since there could be multiple loans from different banks with different interest rates, the Financial Actions screen (F11) needs new lists to shown all of them? Or will it be simply integrated with an aggregated total? And players not have to go to different regional branch to take the loan? Or will there be a list of all the branch offices in different cities in Financial Actions screen?

3) Only citizens can use bank deposit service, not AI/player persons and corporations? If they are allow to use banks new separate fields are needed to show time deposits and cash. There will be new field of interests income in financial report as well.

4) If 3 is implemented, there will be time deposit for AI/player entities, does that means cash and time deposit will be treated as different assets in financial reports? And only Cash will be shown at the bottom realtime toolbar as "real liquid cash"? And when an entity try to use time deposit, will there be a penalty fee to pay for early withdraw, or will it be forced to wait?

5) What would happen if an entity try to take a loan from its own bank branch? If a player can attract deposits, its essentially get direct finance from citizens, instead of via financial institute. The running cost/salary/overhead or building cost (setup funding as the initial reserve) has to be large enough to balance out this advantage.

6) What about cross city loans? Will there be pseudo foreign exchange penalty/cost like freight cost for goods? In real life there's a reason why people don't deposit their cash to the highest interest rate bank, or take a loan from the lowest interest rate bank anywhere globally, but choose nearby branches. Since there's only one currency, one financial market in the game currently, this is just a check balance measure. Or will there be a plan to implement FOREX? And if 3 is true which branch will persons be using? Ironically in real world, rich CEOs often have offshore account seeking least tax, and highest investment payback, but not their corporation firms, since they need local currency to do business.

From interface and game mechanics thought 3 to 6 open up quite a big can of worms to deal with. The initial plan has to draw a line somewhere. But still need to be reasonable enough to justify the implementation of banking sectors. But the good thins is the role of central bank will be quite clear, as interest rate is not a simple number, but determined by the open market operations. Setting different reserve level can and should affect the money supply a lot. And central bank only needs to worry about target rate, and their holding of banks deposit, and using policies. This also brings an interesting question about bank's financial reports though. Will bank branches have separate financial reports? Their structure is quite different from normal manufacturing company financial reports, less so for income statements, but a lot different in balance sheet, and involves central bank.
-------------------------------------------------------------------
Twitch channel : twitch.tv/ancientbuilder
Youtube channel : www.youtube.com/user/countingtls
-------------------------------------------------------------------
therealevan
Level 4 user
Posts: 178
Joined: Sun Jan 27, 2013 11:37 pm

Re: New Banking System

Post by therealevan »

The "Loan to Corporations" feature is what I'm eye balling, definitely a much needed item.
Image
Post Reply