Capitalism Lab – Building a Banking and Investment Company! - First Intro then Play!

► Download the script file: https://www.capitalism2.com/forum/vie...

Building a bank from the ground up – This is what we do in this session. The business model of a bank, which we follow in our session, looks simple at first glance. On the other hand, when looking into all the details, we soon recognize, a lot of numbers are involved and need to be managed. In our session, we also play the role of an opportunistic investor. We invest into companies and with our knowledge on business strategies, we will bring them to success and sell them with a much higher price at the stock market. Capitalism Lab. Banking and Finance DLC. Subsidiary DLC. Watch, learn, play by yourself and have fun! :-) -- Watch live at   / lightproton  

00:00 - Intro
12:26 - Gameplay

► As we all know, banks are making money with money. Through your bank branches, your bank will retrieve money from private customers. Private customers will put their money onto your bank by deposits. In exchange for the deposits of your private customers, your bank will pay an interest rate to the customers. Paying the interest rates to your customers will be a large expense for us. The deposits of your customers are our liabilities since customers can take away the deposits from your bank and in this case your bank owes them to pay back their money. Your bank earns money with loan interest income. Your bank will give loans to customers and the customers will pay interest rates back, which will generate the banking income. Therefore, the interest rate income from loans must be higher than the interest rate expenses for deposits. Whereas the interest rates for deposits is quite stable, the interest rates for loans will vary a lot. Our bank asks for higher loan interest rates the lower the credit rating of the loan receiver. -- https://en.wikipedia.org/wiki/Bank#Bu...

► To retrieve deposits from customers, the bank branches follow a similar model as the marketing mix and the four P’s for retail stores. A place with a high consumer traffic is important so that consumers enter the bank branch. For promotion, we will invest into ads in city local media firms to establish our bank brand. The service of our bank, the product so to say, is represented by the service quality. It can be improved by training of staff and reducing the waiting time for customers by establishing additional bank branches in the same city. The interest rate corresponds to the price of our bank service. Those aspects define our market position in the competition. We will try to build bank branches in places with high consumer traffic and try to reach higher values for our bank brand, our service quality and our interest rate than our bank competitors and having done that we will retrieve a lot of deposits in short time.

► If all customers in a short period of time take back their deposits, this is called a bank run. If customers start to believe that a bank gets insolvent and their deposits get lost, the customers may start to take their deposits away and initiate a bank run. This can destabilize a bank and lead to a sudden bankruptcy. To reduce the risk of bank insolvency specific measures can be put in place. -- https://en.wikipedia.org/wiki/Bank_run

► First, it is a good idea to limit the money from customer deposits which can be used for loans. This can be set with the loan-to-deposit ratio. For our bank, we will allow that 80% of deposits can be used for loans. Therefore, we will set the loan-to-deposit ratio in our bank HQ to 80%. The remaining 20% serve as buffer to be able to have enough liquidity, means cash, to pay back money in case of cash withdrawals from customers. Please note, if the loan-to-deposit ratio gets too low, the bank runs into the risk of becoming unprofitable, as interest expense for deposits may exceed interest income from loans. -- https://en.wikipedia.org/wiki/Loan-de...

► To improve the robustness of banks against unexpected losses and eventually avoid insolvencies of banks, central banks and financial regulation put capital requirements on banks. In Capitalism Lab the central bank requires our bank to comply to the so-called bank capital ratio. In our session, we set this value to 7%. The bank capital ratio is the ratio of the bank equity capital to its loans to customers. Hence, the bank capital ratio is calculated by dividing our equity money by the loans to our customers. The equity money is provided by us transferring money from our corporation to the bank and by the bank’s income. Our bank must keep the bank capital ratio above the minimum requirement of 7% to be compliant to the central bank’s requirement. If our capital ratio falls below 7% a notification will ask us to act. -- https://en.wikipedia.org/wiki/Capital...

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