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SimBank
Bank Financial Management
Simulation
Fernando E. Arellano, Ph.D.
University of Dallas
Richard D. Johnson, Ph.D.
Colorado State University
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¿What is SimBank?
• SimBank is a software program that simulates
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commercial bank operations.
Simulated operations pertain to the financial
management of a commercial bank.
Up to twelve quarters can be simulated.
Up to fifteen banks or teams can participate in
up to twelve quarters of the financial
management of a commercial bank?
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Operations Simulated
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Making loans
Receiving deposits
Making and receiving inter-bank loans
Receiving loans from the FRB
Issuing and redeeming subordinated debt
Buying and selling Treasury securities
Distributing dividends
Issuing and repurchasing stock
Selling mortgage loans
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Main Operations
• Making loans
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– Commercial (two types)
– Mortgage
– Consumer
– Agricultural
Receiving deposits
– Demand deposit accounts
– Interest bearing transactions
– Savings accounts
– 6-month and 2-year CDs
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Funding Sources
• Long term:
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Issuance of stock
Subordinated debt (capital notes)
Sale of mortgage loans
Long-term deposits (2-year CDs)
• Short term
– Deposits (demand deposits, interest bearing
transactions, savings, and 6-month CDs)
– Inter-bank loans
– Loans from the FRB
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Investment Options
• The bank can invest in:
– Treasury securities
• 3-month Treasury bills
• 1-year Treasury notes
• 5-year Treasury notes
• 10-year Treasury bonds
• Excess liquidity (Fed Funds) can also be used to
make inter-bank loans.
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Characteristics of the Initial Bank
• Banks develop their operations in an economic
environment set by the instructor or by default.
• At the beginning of the simulation all banks have the
same:
– Size, profitability and capital structure.
– Loan portfolio
– Interest rates
– Deposit structure
– Expenditures in promotion
– Average salary
– Number of branches
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Economic Environment
• Loan and deposit volumes respond to interest
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rates variations and expenditures in
promotion.
They also respond to general conditions in
the economic environment (GDP, inflation,
interest rates) and to a particular economic
sector (housing, agricultural, consumer).
Additionally, in the case of commercial loans,
they respond to levels of compensating
balances.
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Economic Environment
• They also respond to fees charged in demand
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deposits (DDA) and interest bearing
transaction (IBT) accounts.
Finally, loan and deposit volumes for a bank
are a function of average salaries and the
number of branches.
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Economic Environment
• There are transaction costs for:
– Making and receiving inter-bank loans with
Fed Funds
– Selling Treasury securities
– Issuing and redeeming subordinated debt
(capital notes)
– Issuing stock
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Regulatory Environment
• Each bank has to comply with a required level
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of reserves.
There is a minimum capital requirement.
In case any of the above requirements are
not met, banks are subject to monetary
penalties.
There is a minimum average salary for all
banks.
There is a maximum number of branches that
a bank can open in any given quarter.
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Bank Interaction
• The banks in the simulation compete for loans
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and deposits.
Competition is carried on through the setting of
interest rates for loans and deposits.
Additionally, banks can set compensating
balances in commercial loans.
Banks can also charge service fees on demand
deposits and interest bearing transaction
accounts.
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Bank Interaction
• Each type of loan and deposit has an interest
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rate elasticity on which allocation of volumes to
banks are determined.
Allocation of loans and deposits is also
determined based on:
– Expenditures in promotion by type of loan and
deposits
– Average salary
– Number of branches
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Bank Decisions in SimBank
• Participants make decisions pertaining to:
– Interest rates for loans and deposits
– Promotional expenditures by type of loan and
deposits
– Compensating balances in commercial loans
– Service fees in demand deposit and interest bearing
transaction accounts
– Average salary
– Number of new branches
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Bank Decisions in SimBank
• Participants make decisions pertaining: (cont.)
– Inter-bank loans
– Borrowing from the FRB
– Issuance and repurchase of stock
– Issuance and redemption of capital notes
– Distribution of dividends
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Bank Decisions in SimBank
• Decisions on interest rates and promotion in
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prior quarters impact current quarter allocations.
Funding is determined by short and long term
bank decisions.
If funding is insufficient, the bank will receive an
unplanned loan from FRB at a high interest rate.
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Loan and Deposit Allocation Criteria
• The volume of each type of loan available for all
the banks in the simulation is impacted by:
– In Commercial Loans
• Industrial Production index
• GDP
– In Mortgage Loans
• Number of new house permits
• GDP growth
– In Agricultural Loans
• Agricultural production index
– In Consumer Loans
• GDP
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Loan and Deposit Allocation Criteria
• The volume of each type of deposit available to
all banks in the simulation is impacted by the
behavior of GDP and the average interest rate in
each type of deposit
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Loan and Deposit Allocation Criteria
• Loan deposits are allocated to each bank based
on the following criteria:
– Interest rates
– Promotional expenditures (by type of loan and
deposit) and total expenditures
– In commercial loans, compensating balances
– In DDA and IBT, service fees
– Average salary
– Number of branches
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Loan and Deposit Allocation Criteria
• Total loan and deposit volumes are also a
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function of the economic environment.
Some loans volumes are a function of the
growth in a particular sector.
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Evaluation Criteria
• After each quarter each bank receive points
based on:
– Stock price
– ROE
– Debt ratio
– Liquidity ratio
– Loan losses
– Interest rate risk
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