Banking Money Machine

[jamills102]

Hey!

There is a bit of an imbalance that I am not sure of a fix for... At some point the bank turns into an enormous money making machine. I think it stems from the interest rate you can get on bonds/ how bonds are a bottomless pit (meaning it is a limitless market). Basically all you need to do is issue bonds for 9-10% and give them to your bank (I think the central banks interest rates were 12 or greater). The spread I was getting was about 5% on free money. I ended up getting up to $1 trillion a year profit. I did this all while maintaining an A credit rating.

[David]

Would welcome more user feedback on this as it doesn't look like a bug per se.

A few key considerations:
-How easy is it to pull this off? What conditions must be met in order to execute it?

-Can the same be done in the real world?

-Will banning this make the game more fun or less fun? (If one thinks it is excessive, perhaps the easiest way is for one not to practice this. For others, they may just want to experiment different kind of possibilities with the Banking DLC.)

-If banning this will make the game more fun, what will be the effective way to ban it?

[elaken]

Short answer - the bank's unique access to high-return investments will do some of this automatically (even if you gather no deposits, the ability to compound your equity in an unlimited fashion at 15-20% will make you the largest entity in the game very quickly). You can juice those returns further by playing games with the short bond market.

Would welcome more user feedback on this as it doesn't look like a bug per se.

A few key considerations:
-How easy is it to pull this off? What conditions must be met in order to execute it?

It's very easy to pull off in practice. However doing it "effectively" is 1) very tedious, and 2) dependent on some of the game parameters.

Those parameters are:
Base Loan Interest Rate = High or Very High, and
Economy's Impact on Loan Defaults = Low
Bonds --> Loose with high limits.
It also seems that you need a nontrivial Initial Net Interest Spread.

Under those parameters, the best way to do it that I have found is to :
Issue a lot of 1-year bonds,
put the proceeds into your bank (less one year's interest payments, although you can take that out one quarter/month/day at a time if you want)
let a year elapse,
repeat.

It also works with some of the parameters more stringent, just less easily / more riskily / less obviously.

-Can the same be done in the real world?

Sort of. In the game, this doesn't work if you issue longer-term bonds (because the spreads go down), and this is how it works in the real world too. What you're really getting to here is the term structure of interest rates - i.e. in normal bond market conditions, longer term bonds have higher yields than shorter term bonds (i.e. Normal Yield Curve). What follows from that is: if you can borrow short-term money (cheap) and buy long term money (less cheap), you can create "free money."

Lots of examples out there, but a simple one that you can find in publicly traded markets is something called a Mortgage REIT. This is essentially what they do - issue short term bonds (say at 2%) and use those funds to buy mortgage bonds (say at 4%). This is also one component of how investment banks make money (which are a lot more complex, so stick with mREITs for simplicity).

I will emphasize that while this sounds like free money, it is not. There are huge risks in doing this (even independent of loan default, the rates moving in the wrong direction relative to one another can also sink your trade), and the spreads are small so you have to leverage quite a bit. Go look at what is happening to mortgage REITs right now...

In the game what happens is you get to a recession and your bank takes defaults which the bank can take (because the bank has tons of equity), but the parent of the bank can't (because it has lost money it owes). You can death-spiral quickly if you have levered too highly and your bonds cannot be rolled at attractive rates - i.e. you will then owe higher interest on the same bonds and you now have a smaller base of capital to earn interest on. So that "deterrent" to the strategy works unless you have set up the game to make banking permanently profitable.

-Will banning this make the game more fun or less fun? (If one thinks it is excessive, perhaps the easiest way is for one not to practice this. For others, they may just want to experiment different kind of possibilities with the Banking DLC.)

I've messed around with it a bit. If you set up the parameters correctly it's just a lot of bond issuing and making sure you have enough interest on hand. Honestly, not fun and won't be fun unless and until until you build some sort of automatic bond roll for players. I don't do it anymore because if you set the parameters too loose you quickly find yourself just holding a button down for a long time to issue trillions in bonds every few minutes.

-If banning this will make the game more fun, what will be the effective way to ban it?

Actually pretty hard to ban with existing dynamics. The issue is: you have a source of capital at one price (bonds, which I assume we want to keep in place), perfect capital fluidity between that source and your bank's loan book (which I assume we need to keep in place for banks to work and not go bust, etc), and a sink for capital at a higher price (loans) -- It's just a basic "arbitrage"-esque trade.

A way to "ban'" it would be to actually add cost and friction to the creation and operation of a loan book, and add some sort of limit to the total value of loans outstanding in the game. Loans are very expensive and time consuming to create, and there are plenty of operating costs behind them (credit monitoring, etc). Almost every bank falls within spending between 40-60% of it's NII on operating costs and credit reserves (which we pointedly don't have in game), for instance. You can't normally just dump billions of dollars into a box and get a giant book of conforming loans out - banks typically spend quite a lot of money building and maintaining those loan books and most of those costs aren't even in the physical branches you see (which are actually more about the other side of the bank, cheap deposits).

That leaves us with a fairly obvious question that might be your answer - if I am looking at a universe of 3 cities with 3mm population total, and average incomes of $40K....who exactly am I lending $10 Trillion to?

Basically, the unlimited source bit is true-ish (you are actually capped by your equity), and the unrealistic part is the bottomless cheaply-operated loan pit.

[David]

1) Do you think the game should limit the loan demand? Should it be an optional setting on the New Game Setting menu that players can still go for unlimited loan demand if they wish?

2) When the loans have hit the limit, banks will stop getting new loans. What kind of alert or hints do you think the game should display on the Banking HQ interface so that the player will not get confused about why the bank suddenly seeing its profit starting to decline?

3) Do you think the game need to introduce any kinds of new management options or tools on the Bank HQ interface to help the player manage this in an automated manner, to avoid too much micromangement resulting from this change? If so, what are your suggestions for such options or tools?

[moneytheory]

LOL it isn't a machine for me. All i can make is about $1,458M a year maybe be slightly more. Can anyone tell me how to make more profit from the banks?

[dubin]

1) Do you think the game should limit the loan demand? Should it be an optional setting on the New Game Setting menu that players can still go for unlimited loan demand if they wish?

2) When the loans have hit the limit, banks will stop getting new loans. What kind of alert or hints do you think the game should display on the Banking HQ interface so that the player will not get confused about why the bank suddenly seeing its profit starting to decline?

3) Do you think the game need to introduce any kinds of new management options or tools on the Bank HQ interface to help the player manage this in an automated manner, to avoid too much micromangement resulting from this change? If so, what are your suggestions for such options or toolfei
非常需要控制贷款需求，不能无限。

[dubin]

1) Do you think the game should limit the loan demand? Should it be an optional setting on the New Game Setting menu that players can still go for unlimited loan demand if they wish?

2) When the loans have hit the limit, banks will stop getting new loans. What kind of alert or hints do you think the game should display on the Banking HQ interface so that the player will not get confused about why the bank suddenly seeing its profit starting to decline?

3) Do you think the game need to introduce any kinds of new management options or tools on the Bank HQ interface to help the player manage this in an automated manner, to avoid too much micromangement resulting from this change? If so, what are your suggestions for such options or tools?

是，需要限制大卫

[David]

Please feel free to let us your thoughts about the questions #1 to #3.

[Kristo]

Hi,

you can use the population as limit. Here are some factors in play:
1/ Not everyone needs a loan. Some people spend their whole lives without ever needing a loan.
2/ People who takes loans usually don't have more than 3-4 loans at the same time.
3/ Most people take 1 loan, repay it, stay afloat some time, and take new one. If the economy is booming, this "some time" is longer.
4/ People with low-income and no-income can not qualify for a loan at all, or it will be a very risky thing for a bank.
5/ Banks give loans depending on how a person can repay them - the loan and the interest.

So all you need is a equation:
Let's see you have 3 cities, combined population is 5mln, and 3 banks in-game.
From the initial 5mln people, you must remove top-earning 5% of people, who'll never need a loan. Then you must remove all the people who are Ok at the moment (you can calculate that by seing how manu people have deposits in these 3 banks)
Then you remove the unemployed people. This number is always moving and it goes up during recessions. In booming economies these people are no longer "poor", they're now "middle class" or "working class" and need loans for things like houses and cars (and can repay the banks with no problems). Also you must set the game to limit their loans to the actual money they can spend. Let's say that a person can easily spend 40% of their monthly income to pay back the bank.
So what you need to calculate is - number of people, who may use a loan, multiply their number by random number of [1-3] (number of active loans at any time), multiply that by 40% of the avarege wage (this can be done globally or on city-by-city basis) and you'll see the limit of potential profits to be made from loans. That's the "loan market" and those 3 banks will compete for % of it.

Let's have an example:
Number of people in-game - N
Number of people who don't need loans - Z,
Number of avarage loans per person - Y (which can be calculated city-by-city or globally, and it's number between 1-3 or 1-4, or 1-5, etc)
Portion of a wage, people in-game can dedicate to repaying - M (in %, between 20-50)
Avarage wage (per city or globally) - S
Total limit of potential loan market at any given time = X
(i also think the inflation rate can play a role here, but i omitted it for now)
The equation is (N-Z)*Y*M*S = X, now let's put some numbers:
N = 5mln, Z = 1mln, Y=2, M=40%, S=2000$ (all of these can move at all times during a game)
My calculator shows 6,4 trilion (6400 billion) dollars market.

Now you can also make a rule in-game, that no bank should be exposed to more than 20% of the whole market (in real value of the loan market), so the limit per bank can be a cool 1,28 trillion dollars in this scenario. In good economy, this number goes up and ing recession it goes down. This rule can be switched on/off by the players.

Another possible rule is a thing called "bank guarantee reserve" - it exists in some countries and it's basically insurance for banks. Each year every bank needs to deposit around 10% of their profits (but with some maximum sum like 50mln or something like that) in the Central Bank. CB doesn't use these money for anything during normal economy. In recession or worse (a bank going bankrupt), CB has autorithy to inject money from this reserve into a struggling bank. In-game that can be made that every bank during recession will receive its own accumulated money in/from the fund for 3 years, each year receiving 33% of the total sum, and this can be triggered by CB decision. In bad economy giving money for this fund can be stopped or slashed, again by CB decision.

And yet another possible rule is "bank license". Every city will ask you to pay some sum of money (between 1 and 10 mln, depending on city's policy) as a licensing fee. After/If the bank survives at least 10 years of operation, this fee is halved.

Now, what do you think?

[elaken]

1) Do you think the game should limit the loan demand? Should it be an optional setting on the New Game Setting menu that players can still go for unlimited loan demand if they wish?

In principle, yes.

2) When the loans have hit the limit, banks will stop getting new loans. What kind of alert or hints do you think the game should display on the Banking HQ interface so that the player will not get confused about why the bank suddenly seeing its profit starting to decline?

There is no "you've saturated the market for deposits", and if we don't need it there why would we need it here? Whatever hint (I wouldn't recommend alerts) you come up with would basically be the same sort that come with deposits (they stop growing so fast, % of total vs other banks in the competition screen, etc.). The player could easily change this with the same sort of slider they do now for deposit volumes.

Separately, since there is currently some opacity there, you might create a "total deposits available in this city / % captured" and a "total loans available in this city / % captured" type of displays. That may be too on the nose, so if you want to make it less transparent to the player, you can provide some indicator (like % of GDP in deposits/loans) so the player has some idea of why growth has slowed.

I am not a fan of the "super complicated formula" approach (the posters example above spits out a ridiculous answer, for instance). You can do something simple like private credit as % of GDP (which globally/historically is in the 100-200% range). If you want to get cute about it, you can add some modifiers that basically make it grow/shrink with recession/expansion and generally show a positive correlation with relative wealth - richer countries do tend to have more debt (markets are more stable / predictable so creditors can lend more). So in the US, for instance, private credit is ~200% of GDP and it grows/drops with expansions/recessions.

3) Do you think the game need to introduce any kinds of new management options or tools on the Bank HQ interface to help the player manage this in an automated manner, to avoid too much micromangement resulting from this change? If so, what are your suggestions for such options or tools?

I don't know that there is any new micromanagement of the actual bank to be done. I assume that on the backend, loans are just a number (and are not unitized loans being amortized on a schedule), so there isn't much more to do. I for one would love to see different focus areas of banks (i.e. local business banks vs consumers as opposed to "lend to a giant bucket of A-Grade"), and non-interest income (i.e. i can attract deposits with low rates and stick people with checking account fees and what have you, generally a very high percentage of bank revenues that are absent here), but again there isn't more micro-management to it if we are just talking about generic loans that aren't unitized.

Edit to add: one of the things that would actually make banks less micromanagement-intensive is some sort of auto-"dividend" / capital transfer feature. Although often time leaving equity in the bank is the best place for it (it's the highest return you can get in many cases), there are times when I'd prefer it be slowly dripped out (monthly for instance) when my capital ratio gets over a certain threshold without manual intervention. For recession/losses this does bring up the concept of reserves, but that might be another thing to solve later. Banks can be complicated!