The Ultimate Guide to ProBanker

Strategy, tactics and a quick reference guide to help your bank become profitable.


Welcome


In this trimester, you will be using an interactive simulation software, ProBanker, which is TOTALLY DIFFERENT from your normal classroom setting! Students will be working in teams, to input a range of decisions which will ultimately affect the next decisions made for the team, and... THE WHOLE CLASS! You will be using this tool VERY OFTEN. So.... watch the introductory video to find out what Prof. Pear has to tell you guys! Good Luck!

Gameplay


Learning


"Why do we need to play this game? What should we be focusing on? How do we get the bonus / reward marks? If we lose money in the game, will marks be deducted? How do we win this game?"

Watch the video to answer ALL these questions! *psst* TIPS are given in this video!

Game Modes

ProBanker has two game modes: Autosim mode and Competitive mode.


Autosim Mode

  • Management team selects a template and creates a "game"
  • "Play Against Machine" --> One bank competes against pre-programmed competitors.
  • Permits you to learn about ProBanker‘s program features and economic characteristics.
  • Permits you to simulate a variety of pricing, advertising, and funding decisions, starting from the same point in time by rolling back the quarters ("Turn Back Time").
  • Costs, revenues, loan demands, and deposit supplies resulting from their decisions are available in reports.

Competitive Mode

  • Administrator selects starting financial conditions for all banks in the "economy". Each management team controls a single bank.
  • Compete directly with other bankers in a particular region.
  • Banks in different regions have no direct effect on one another, although they do operate under the same macroeconomic conditions.
  • Players cannot simulate or roll back in this mode.
  • Costs, revenues, loan demands, and deposit supplies resulting from player decisions are available in reports.

Decisions


Interbank Call Money Lent (FFS)

Banks with excess reserve balances can lend to other banks. When Call Money is "Lent" the selling bank has an asset and the "Borrowing" bank has a liability. Most call money loans in the real world have a one-day maturity, so you should think of ProBanker as asking you to select an average balance of FFS for your bank to hold over the coming quarter. FFS earn an expected return equal to the riskless 90-day CD rate, which is known for certain when Bank decisions are made. However, the actual FFS rate will differ from the 90-day CD rate by a random factor that reflects unanticipated money market developments during the quarter. (Because most FFS lending has a very short maturity the average Fed Funds rate over the coming quarter cannot be known when you are making your decisions.) Your bank's ultimate FFS position also may differ from what you entered, because FFS balances plays a part in balancing the balance sheet.

Interbank Call Money Borrowed (FFP)

The CEO can borrow from other banks and financial institutions through the overnight Call Money market. If some purchased funds turn out to be un-needed, the bank pays a transaction cost to borrow them initially and to re-lend them in the market as FFS. A sound bank will pay a rate on FFP that is equal to that earned on FFS. However, as a bank's leverage increases above some threshold value, its interest rate paid on FFP may include a default risk premium. Market investors will also stop lending to a bank that appears too risky. If your bank becomes too highly levered, uninsured lenders (FFP, Negotiable CDs) demand a higher interest rate to cover perceived default risk. Very highly levered banks will be unable to obtain all the funds they request in these markets. Unless your bank is very highly levered, you will successfully issue all the perfect market liabilities (FFP and Negotiable CDs) you specify. As your leverage increases beyond some critical value, however, you will be required to pay a default risk premium on these liabilities. Once the required default risk premium gets to a second critical value, investors will refuse to purchase all of the FFP or Negotiable CDs liabilities you would like to sell. At a very high leverage ratio, you will be able to sell no new uninsured claims.

Wholesale Deposits

Your bank may issue large certificate of deposit (CD) obligations to obtain loanable funds. Usually, you may issue whatever volume of new CDs you wish, in each of three maturity categories: one, two, or four quarters. The cost of CD funds depends on your firm's leverage: banks with relatively low leverage can issue CDs at the (riskless) treasury rate for bonds with the same maturity. As your bank's leverage increases beyond some threshold level, however, your required CD rate also rises. The market may ration your CD issues if you have very high leverage. Riskless CD rates for the coming quarter equal the same-maturity government bond's yield, as reported in ProBanker's end-of-quarter Bond Reports. However, a highly levered bank's actual cost of CD funds may incorporate a default premium above the riskless rate. The market also refuses to purchase CDs at any price once the bank's leverage has become sufficiently high.

New 8-quarter Government Bonds to Purchase

These are fixed-coupon government bonds. New bonds are purchased at par, but subsequent market rate changes affect bond market values. (A bond's current market value is obtained by discounting its remaining cash flows at the riskless interest rate for the corresponding time to maturity. You may purchase only bonds with an initial maturity of 8 quarters which is the longest maturity in ProBanker's horizon.

Government Bonds to Sell

You select which bonds to sell by specifying their maturity date and book value. The Economic Environment Report specifies the corporate tax rate on capital gains (losses) when bonds are sold before maturity. Having purchased some government bonds in an earlier time period, you may now wish to sell them, in order to make additional loans, to reduce your bank's leverage, or to realize accrued capital gains. . Government bonds may not be sold short.

Provision for loan loss

Actual losses on maturing loans are charged to the Loan Loss Allowance (LLA) contra-asset account when they occur, on the first day of each simulation period. LLA changes through time in the following:

LLAt = LLAt-1 + PLLt - (Actual Losses)t

PLL is the "Provision for Loan Losses." As realized loan losses deplete the LLA, bank managers charge an expense item (PLL) each quarter to restore the allowance account. Your regulator requires that you maintain a LLA equal to a fixed proportion of your current nonperforming loans. Initially, this proportion is 100%, but your Administrator can change this requirement. The applicable proportion is reported near the bottom of the Economic Environment Report. The Provision for Loan Losses cannot be a negative number. Therefore, if you make an excessively large Provision one quarter, you cannot quickly reverse it the following quarter.

Target Reserve for Deposits

By regulation, each bank must hold cash or central bank deposits equal to a proportion of its deposit account balances. In ProBanker, reserve balances must be at least 10% of all demand deposits outstanding. At the end of each quarter, your bank will show two types of reserves: Required Reserves(link) and Excess Reserves(link). ProBanker asks you to estimate how much required reserves you will have for the coming quarter. This is your "Target Reserves for Deposits." If your allocation turns out to be insufficient, ProBanker will transfer resources from other asset categories. If your allocation turns out to be too large, the extra reserve balances may be used to finance investments, or they may show up as "Excess Reserve Balances (at other commercial banks)."

For all loan types, the volume of business you attract varies inversely with the interest rate you charge.

Floating Rate(FL)

Fixed Rate (FR)

Volume depends upon (among other things) the level of market interest rates, GDP, competing banks' FR rates, and customers' expected cost of your bank's floating rate loans.
A loan's spread stays constant throughout its life, the actual interest rate varies with the floating rate loan base. Higher loan standard reduces credit defaults
Maturity 2 quarters 1 quarter, and you specify an exact rate of interest paid on new Fixed Rate loans
Customers Inversely related to the average contract rate that customers expect to pay over the loan's two-period life. Short-term customer loyalty exists in the FR market, which makes the present volume of loans depend on past volumes

Consumer Loans - Fixed Rate (INST)

Mortgage loans (MORT)

You choose a loan rate and an (dollar) advertising level directed at the market.
Maturity 4 quarters 8 quarters
Advertising Holding the loan rate constant, greater advertising increases your loan account balances
Moderately responsive Less responsive

Demand deposits (DD)

Corporate (DDC)

bank's leverage, DDC balances, for any effective interest rate, as customers fear that they will lose their uninsured funds if the bank fails

Market interest rate

market interest rates, average DDC balances

Maturity

Demand deposit balances may be withdrawn at any time without advance notice or penalty, but customers tend to keep positive DD balances even when market interest rates are very high.

You may specify what proportion of your retail and corporate DD operating costs to collect from customers in the form of fees charged.

Example

Given that,
Annual retail DD operating costs = 3% of balances

And you set
Fees = 66% (entered as "0.66")

Your net cost of maintaining retail demand balances would be:
Net cost (per year) = 3%*(1-0.66) = 1%

If you charged fees of "160", you would more than recover your cost of providing DD services. With this fee, you would be making a profit of 1.8% per year on your DD balances.

So, why not just set high fees?

Because high fees are equivalent to "paying negative interest", which reduces the attractiveness of your deposit accounts.

Deposits

Each quarter, you choose a separate interest rate and advertising budget for each of these accounts. New balances earn this new rate, while the rates paid in past quarters continue to apply to older deposits.

deposit rate/advertising, no. of customers maintaining an account at your bank.

Stronger customer relationships make account balances less sensitive to short-run changes in account pricing, and therefore correspond to lower adjustment speeds. Generally, smaller accounts and those with shorter maturities are less price-sensitive. For example, customer relationship effects are more important for savings accounts than for fixed deposits or corporate loans.

Savings Account Deposits

No explicit maturity

Fixed deposits

8-quarter maturity

Implicit interest and reputation effects are moderate

Certificate of deposits (CD)

Your bank may issue large CD obligations to obtain loanable funds. Usually, you may issue whatever volume of new CDs you wish, in each of three maturity categories: one, two, or four quarters.

The cost of CD funds depends on your firm's leverage: banks with relatively low leverage can issue CDs at the (riskless) treasury rate for bonds with the same maturity. As your bank's leverage increases beyond some threshold level, however, your required CD rate also rises.

The market may ration your CD issues if you have very high leverage.

Dividends / Number of shares to sell

These decisions are not covered in our simulations. You can ignore them.

Teamwork


How can your friends be a BIG HELP to you? In this video, Prof. Pear provides suggestions on what you can do FROM THE START of the trimester!

Balance Sheet


Assets

Banks must keep reserve balances at the Federal Reserve Bank, in proportion to their outstanding deposit liabilities. (The Economic Environment Report describes required reserve ratios, which can change over the course of your simulation.) The dollar volume of Required Reserves cannot be known exactly when you are making your decisions, because it depends on your realized deposit balances. Players should estimate their deposit balances, and choose an Initial Reserve Allocation sufficient to satisfy anticipated reserve requirements. If your bank turns out to need reserves in excess of your Initial Reserve Allocation, ProBanker will automatically reduce Federal Funds sold (FFS) or borrow at the Discount Window. Any funds transferred from the latter sources to fulfill RR are assessed a proportional transaction cost of 0.5% (Note: this cost is not an annualized rate and your instructor may choose to increase the cost).
If your "Initial Reserve Allocation" exceeds the level of required reserves, the excess will be held as deposits due from other banks. Although U.S. banks may not (by law) pay explicit interest on these balances, they will perform free services in proportion to the balances you hold with them. These free services frequently relate to check clearing, and hence lower the cost of servicing your demand deposit customers. ER balances earn implicit interest at a rate equal to about 90% (more precisely, 1.0 minus the DDC reserve requirement) of the period's average risk-free federal funds rate. (This rate of implicit compensation for interbank demand balances assumes perfect competition for such balances.) If implicit interest earned exceeds noninterest DD operating costs, the excess is lost to the bank. ER balances incur no transaction costs.
The CEO chooses how much to lend to other banks and financial institutions through the Federal Funds market. FFS earn an expected return equal to the riskless 90-day CD rate, which is known for certain when Bank decisions are made. However, the actual FFS rate will differ from the 90-day CD rate by a random factor that reflects unanticipated money market developments during the quarter. (Because most FFS lending has a very short maturity the average Fed Funds rate over the coming quarter cannot be known when you are making your decisions.) Your bank's ultimate FFS position also may differ from what you entered as an initial decision, because FFS balances play an important part in the process for balancing each bank's balance sheet.
You select a contract rate to charge on these one-period corporate loans. Your bank's FR volume depends upon (among other things) the level of market interest rates, GDP, competing banks' FR rates, and customers' expected cost of your bank's floating rate loans. There is an element of short-term customer loyalty in the FR market, which makes the present volume of loans depend on past volumes. Finally, the bank can choose credit standards (the "Corporate Loan Standard" on the Decision Page) that affect default probability, operating costs, and loan volumes.
These two-period loans are priced as a SPREAD over an economy-wide "floating rate loan base," which is the average of the 90-day CD rate and the quarter's risk-free Federal Funds rate. A loan's SPREAD stays constant throughout its life, although the actual interest rate varies with the floating rate loan base. FL demand is inversely related to the average contract rate that customers expect to pay over the loan's two- period life. (The expected FL contract rate is the average of this period's rate and the expected rate next period, given the bank's SPREAD and the forward rate implied by the government bond term structure.) FL volume is also affected by the determinants of FR.
These consumer loans mature in four periods. The CEO chooses a loan rate and an (dollar) advertising level directed at the INST market. INST customers are moderately responsive to advertising. A bank's market share tends to persist through time, due to moderately strong customer relationship effects.
These 8-period loans have a fixed contract rate and are not marketable. Advertising expenditures have some effect on the demand for a bank's new MORT, though not so much as for INST. Customer relationship effects are also smaller than for INST.
The CEO may purchase new government bonds, which carry a fixed interest rate and mature in 8 periods. New bonds are purchased at par, and the bank's accountants carry bonds on the balance sheet at their acquisition cost. However, subsequent market rate changes affect bond market values. (A bond's current market value is obtained by discounting its remaining cash flows at the riskless interest rate for the corresponding time to maturity. These rates are reported in the Bond Market Report.) The CEO can sell seasoned bonds by specifying the maturity date and book value of bonds to be sold. (ProBanker provides no opportunity to purchase seasoned bonds.) The Economic Environment Report specifies the corporate tax rate on capital gains (losses) when bonds are sold before maturity.
The bank utilizes fixed assets (land, buildings, equipment, and furniture) to produce financial intermediation services. These assets depreciate at an exogenous rate, generating quarterly operating expenses. You cannot change the level of your bank's fixed asset stock, or its depreciation rate.
A single loan loss allowance account serves as a reserve ("contra-account") for defaults on all four loan types. Losses are charged to this account when they occur; LLA is replenished via the expense item Provision for Loan Losses (PLL). Another term for the loan loss allowance (LLA) is the "Loan Loss Reserve." Nonfinancial firms show many such reserve accounts as part of their net worth. For banks, the LLA is generally shown on the asset side of the balance sheet.

Liability

The CEO can borrow from other banks and financial institutions through the overnight Federal Funds market. If some purchased funds turn out to be un-needed, the bank pays a transaction cost to borrow them initially and to re-lend them in the market as FFS. A sound bank will pay a rate on FFP that is equal to that earned on FFS. However, as a bank's leverage increases above some threshold value, its interest rate paid on FFP may include a default risk premium. Market investors will also stop lending to a bank that appears too risky.
The default setting does not allow banks to pay explicit interest on any type of demand deposit account. However, ProBanker permits your Administrator to set positive interest rate ceilings on either type of demand deposit--so check your Regulatory Environment Report to see what regulations apply to your simulations. In addition to the possibility of explicit interest payments, ProBanker banks compete for demand deposit by paying implicit interest in two forms. First, you can direct advertising expenditures to either type of DD account. Second, you can vary the level of your checking-related fees to make your DD accounts more or less attractive. Lower fees elicit greater DD account balances, but your noninterest revenue will also be lower. Setting the fee rate above 100% makes DD services a profitable activity, but it reduces your available "interest free" DD balances. Both types of DD balances are positively related to the effective rate paid on them, negatively related to the level of market interest rates, and positively related to the level of GDP. DDC are more interest-elastic than DDR. Demand deposit accounts have substantial customer relationship effects, especially among retail customers. DDC balances differ from DDR in two additional ways:  DDC balances increase with the volume of corporate loans outstanding, reflecting the compensating balance arrangements that often accompany FR and FL.  DDC balances fall when the bank's leverage increases beyond some critical level, as customers fear that they will lose their uninsured funds if the bank fails.
Under normal circumstances CEOs may sell as many (or few) CDs as they desire, with initial maturities of 1, 2 or 4 quarters. In deciding how many CDs to issue, be careful to note that old CDs "age down" as time passes: last period's 4-quarter CDs become this period's 3-quarter CDs, and so forth. Riskless CD rates for the coming quarter equal the same-maturity government bond's yield, as reported in ProBanker's end-of-quarter Bond Reports. However, a highly levered bank's actual cost of CD funds may incorporate a default premium above the riskless rate. The market also refuses to purchase CDs at any price once the bank's leverage has become sufficiently high.
These retail savings accounts have no fixed maturity, and reputation (customer relationship) effects are very important. PASS balances are positively related to the effective rate you pay, negatively related to the effective rate paid by your Regional competitors, and negatively related to the level of government bond yields. The PASS reserve requirement and interest rate ceiling (if any) can be found in the Economic Environment Report.
These are fixed-rate, two-period retail accounts, also called "Retail CDs." RCD balances are sensitive to the same factors as PASS, but reputation and implicit interest (advertising) effects are less important for the RCDs. Your administrator may impose a deposit rate ceiling or reserve requirement on Retail CDs, which will be reported in the Economic Environment Report. (For technical reasons, the absence of an effective deposit rate ceiling on Retail CDs appears in the Economic Environment Report as a very large negative number.)
These are fixed rate, 8-period retail accounts, subject to the same economic forces as PASS and Retail CDs. Implicit interest and reputation effects are moderate -- that is, lower than for Retail CDs. Your administrator may impose a deposit rate ceiling or reserve requirement for LTRD accounts, which will be noted in the Economic Environment Report.
ProBanker chooses this amount to balance the balance sheet if your other liabilities are insufficient to fund the assets you have purchased. The bank pays interest at a rate above its rate on federal funds borrowed (FFP). (Recall that the FFP rate can include a default risk premium for a highly leveraged bank.) This penalty rate gives the CEO an incentive to forecast balance sheet positions carefully each period. Compute the DWA's rate premium from information on your Full Balance Sheet Report: subtract the rate you paid on FFP from the rate paid on DWA.
Owner's paid-in capital and retained earnings determine the bank's level of equity capital. Higher dividend payments reduce NW, while lower dividends or (naturally) higher profits raise it. The CEO can also change Net Worth by selling new stock or repurchasing stock from the open market. The Net Worth account must fulfill the capital adequacy regulations.

Seniors Advice



Huai Zhong's Advice


+ Read the player manual at least twice.
+ Make full use of the practice rounds with unlimited offline tries.


Jasper's Advice


+ Have a concrete strategy.
+ Understand the economic environment, do GAAP analysis to make sure your bank can survive any situation.


Sean's Advice


+ Always runs simulations.
+ Know the rates and inputs you are going to set for the competitive mode.


Yu Han's Advice


+ Find out the mix of loans using the simulation
+ Consider your opponents strategy, its not always about the margin but the volume of loans matters too.


Yuan Liang's Advice


+ Balance between loans and funding and the advertising costs to acquire loans.
+ Conduct cost/benefit analysis and make forecast.

Notes