CESIM BANK SIMULATIONIntroductionSimulation for banking and financialservices
2The goal of the Cesim Bank Simulation is to facilitate understanding of thefront and back office operations of a bank, an...
3Key learning goals include:a. Balancing risks and the growth of the balance sheet.b. The division of sources of bank fund...
4Learning ProcessApplying new ideasAnalysis & planningObservations & reflectionsResults & teamworkGeneralizing from theexp...
5Targeted atEducational sector Financial services industrya. Introduce banking to participants in anew, much more engaging...
6The simulation is completely web based. There is no need to install anyseparate applications and the simulation can be ac...
7The simulation platform includes the following pages:[Home] - Overview page with deadlines[Decisions] - All decisions are...
8Each simulation market consists of 2-12 teams, with 1-8 members in each.The number of parallel simulation markets is not ...
9As an instructor you have significant discretion over the basic structure of thesimulation market. By default, all Cesim ...
10The course options available through Case Management include:a. Private customer segmentb. Institutions customer segment...
111. Go to http://www.cesim.com and choose “Register” on the top right.2. Fill in your email and other details and select ...
12Flow of OperationsIntroductionPracticeRoundStrategy andObjectivesDecisionmaking (x 5 – 12)Conclusionand AnalysisDecision...
13The main objective for the teams is to deliver sustainable, profitablegrowth. Typically this is measured by a ratio call...
14Decision making is round based. One decision making round equals onefinancial year.In the beginning of the game, so call...
15Decisions are entered in the white cells. These will be used in the actualresults calculation.Estimations are entered in...
16New challengesThe bank’s operations have expanded from the early days to many newexciting fields of finance. Retail and ...
17As a response to economic turbulence, new regulations are in process ofbeing enforced in the banking sector, and this de...
18Cesim Bank OverviewSystems & Processes (Technology infrastructure support)Personnel management (Resources, management, e...
19Summary of Service OfferingService Retail Private* Institutions* SME* Corporate*Mortgage loans x xOther loans x x xDeman...
20Banking and multitude of financial services include several elements that areunlike those found in other commercial acti...
21Solvency riskBanks typically have very high financial leverage as measured bycommonplace indicators like equity ratio. B...
22Customer facing front office operations include Retail, SME and Corporatebanking as well as Investment services and prod...
23Retail Banking is responsible for the bank’s consumer level customers andtheir traditional banking service needsConsumer...
24Lending decisionsa. Consumer loan average margin – retail / privateb. Mortgage loan average margin – retail / private, 1...
25Deposit products (borrowing)a. Demand deposits – retail / privateb. Fixed term deposits – 12 months / 2 yearsTeams must ...
26SME Banking consists of banking relationship with all business customersexcept for the largest enterprises that are cons...
27Real estate lendingReal estate sector has been separate from the SME customer mass since it istypically very sensitive t...
28Corporate and investment banking business consists of advisory transactionsand general advisory on hourly basis.There ar...
29Factors affecting demand:a. Pricing (percentage based fee on total transaction value and hourlycharge for general adviso...
30Investment services consists of managing and marketing investment servicesto the available customer segments, and acting...
31Portfolio managementPortfolio management consists of offering tailored full service wealthmanagement to private and inst...
32Securities brokerageSecurities brokerage consists of offering trading services in cash andderivative instruments in equi...
33Investment products consists of managing and developing investmentproducts for marketing to the bank’s customer base.The...
34In-house investment funds IIFor new funds, teams must specify the desired fund class, sub class andgeographical target m...
35Structured productsThe wealth of options available for investors consists of far more than simpleinvestment funds and th...
36In addition to client facing front office operations, the Cesim Bank Simulationcovers a range of supporting back office ...
37The personnel management function consists of managing the sufficiencyof sales and support personnel in all the bank’s d...
38Sales & Support resourcesImmediate customer service and support needs require certain level ofminimum resources. In addi...
39Investment options include:a. Internet banking servicesb. Banking product developmentc. Customer service processes and e...
40The risk management function deals with risk identification, quantification andprioritization and insituting proper cont...
41Interest rate risk managementA core risk management issue in banking is the interest rate risk thatemanates from asset-l...
42Bank regulatory issues typically fall under structure, solvency and liquidity.In Cesim Bank Simulation we have included:...
43Bank balance sheet and fundingIn banking the customer-facing product and sales decisions, borrowing andlending, form a c...
44The goal of the financing decisions is to minimize the cost of funding to thebank and to return capital to the equity ho...
45Equity MarketsFinancingNew shares can be issued to raise equity financing. Solvency regulationsdecree a certain level of...
46Treasury investmentsThe teams can manage the bank’s balance sheet by investing certain fractionof the bank’s assets into...
47ProjectionsProjections can be launched from the bottom of the page and they consist of incomestatement, balance sheet, s...
48Net interest margin, % = Net interest income / Interest incomeIndicates the bank’s ability to generate value from its co...
49Total Capital ratio, % = Tier 1 + Tier 2 Capital (subordinated debt) / Total riskweighted assetsIndicates the bank’s fin...
50Profit before taxes, % = Profit before taxes / Total incomeIndicates the bank’s ability to generate profits from its ope...
51Key Financial Ratios IIEPS (Earnings per share) = Profit for the period / Number of shares outstandingDividend yield-% =...
52Cumulative Total Shareholder Return is the average annualizedpercentage return that a company delivers to its shareholde...
53Decision ChecklistOn the decision checklist page all team members’ decisions can be seen side byside. By pressing ’copy’...
54After each round the system generates reports that depict the results of eachteam in a particular market.Results consist...
55AnalyzersSome results reports include additional information only available in theInstructor Results view. We call these...
56CesimArkadiankatu 21 A00100 Helsinki, FinlandTel. +358 9 406 660www.cesim.comcontact@cesim.comTechnical Supportsupport@c...
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Cesim Bank Banking and Financial Services Management Simulation Game Guide Book

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The goal of the Cesim Bank Simulation is to facilitate understanding of the front and back office operations of a bank, and their interaction in a competitive environment, and to help cultivate holistic and fact-based management culture, develop analytical skills, and create awareness about the current banking operating environment.

Find out more here: https://www.cesim.com/simulations/cesim-bank-management-simulation-game/

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Cesim Bank Banking and Financial Services Management Simulation Game Guide Book

  1. 1. CESIM BANK SIMULATIONIntroductionSimulation for banking and financialservices
  2. 2. 2The goal of the Cesim Bank Simulation is to facilitate understanding of thefront and back office operations of a bank, and their interaction in acompetitive environment, and to help cultivate holistic and fact-basedmanagement culture, develop analytical skills, and create awareness aboutthe current banking operating environment.The task for the participating teams is to manage a bank with several frontand back office operations in a single geographical market. In the role of abank manager, the teams will be responsible for retail and SME clients,lending and borrowing, front office and back office, and customers withdeposits, mortgages and investments. They’ll have personnel to manage, ITsystems to develop, regulators to report to and capital markets to raisefinancing from, provided that they are pleased with the way the bank ismanaged.What is Cesim Bank Simulation?
  3. 3. 3Key learning goals include:a. Balancing risks and the growth of the balance sheet.b. The division of sources of bank funding into core deposits and managedliabilities.c. Understanding the bank income statement and balance sheet.d. The function of the central bank as the lender-of-last-resort.e. Bank specific solvency and liquidity measures and regulation according toBasel III.f. Bank specific terminology and results presentation including many uniquefinancial ratios.g. Uniqueness of money as the bank’s core product.h. Profitability of different customer segments.i. Understanding basic banking products and services and theirinterconnectedness.Learning Goals
  4. 4. 4Learning ProcessApplying new ideasAnalysis & planningObservations & reflectionsResults & teamworkGeneralizing from theexperienceLectures & discussionConcrete experienceDecision making
  5. 5. 5Targeted atEducational sector Financial services industrya. Introduce banking to participants in anew, much more engaging wayb. Allow the participants to learningcomplex banking issues by makingthem in charge of their own bank andcompete against their peersc. Content configuration options allow fortargeting optimal learning outcomesa. Illustrate core banking topicsb. Demonstrate the interaction of differentbanking functions in a competitiveenvironment or key initiatives in asimulated, yet familiar settingc. Broad range of customizationpossibilities out of the boxd. Great platform for custom development
  6. 6. 6The simulation is completely web based. There is no need to install anyseparate applications and the simulation can be accessed from any computerthat has an internet connection.The simulation platform allows team members to work virtually if they wish.Each team member has her/his own account that enables them to makedecisions and scenarios on their own and later combine the outcomes withthe other team members on the [decision checklist] -page.The platform also includes a communications forum that can be used tocommunicate within teams and between all teams in one market.Web Based Solution
  7. 7. 7The simulation platform includes the following pages:[Home] - Overview page with deadlines[Decisions] - All decisions are made under ’Decisions’[Results] - Results become available in this area after each deadline[Schedule] - Simulation schedule is available on this page[Teams] - Teams and team members in your market can be viewed here[Readings] - Access to the decision making instructions and case description[Forums] - Access to the discussion forums for team and marketSimulation Platform Structure
  8. 8. 8Each simulation market consists of 2-12 teams, with 1-8 members in each.The number of parallel simulation markets is not limited, making it possible toutilize the simulation for any number of students in the class.All teams are starting from exactly the same position, with similar marketshares and profits. Equally, teams will face the same market conditions duringthe simulation.Note that the teams compete against other teams in their own market,not against a computer. The decisions of each team influences the otherteams’ results and the market development overall.Simulation Organization
  9. 9. 9As an instructor you have significant discretion over the basic structure of thesimulation market. By default, all Cesim Bank Simulation courses are set toinclude a limited set of functionality that can nonetheless be complementedthrough [Case management]If you want to make changes to your course, you need to go to [Casemanagement] – page and click tab ”Your parameter sets”. Then follow thesesteps:1. Click ”Create new simulation parameters” and name it. The parametersnow appear under ”Your parameter sets”2. Click ”Parameters” and click the box Modules3. Activate desired feature set4. Go back to [Case management], choose tab ”Apply parameters togroups]” and click ”Assign”Note that you can also change all the other parameters with the same stepsas presented above.Course Options I
  10. 10. 10The course options available through Case Management include:a. Private customer segmentb. Institutions customer segmentc. SME bankingd. Number of SME credit rating classese. Corporate bankingf. Investment services and productsg. Brokerage servicesh. Portfolio management servicesi. Ability to create new investment fund productsj. Third party investment fundsk. Structured productsl. Systems & Processes operationsFurthermore, the following options are available:a. Naming of SME credit rating classes, partnership asset managers andinvestment fund classesb. Domestic and foreign currenciesCourse Options II
  11. 11. 111. Go to http://www.cesim.com and choose “Register” on the top right.2. Fill in your email and other details and select the language and the timezone.click <next>3. Enter the course code that is given by your instructor.click <next>4. Enter license code if required. (Note that if the license code is requiredyou must enter a valid code. Otherwise the registration will not continue.)click <next>5. Choose your Group and Team. Group equals one world where amaximum of 12 teams operate.click <next>6. Click “Finish” and your registration is almost done.7. Check your email and click the activation link.8. Login with your email and password at www.cesim.com.Student Registration Process
  12. 12. 12Flow of OperationsIntroductionPracticeRoundStrategy andObjectivesDecisionmaking (x 5 – 12)Conclusionand AnalysisDecision making withthe web interfaceSystemcalculatesthe results automaticallyat the given deadlineResults from theprevious round andmarket info for the newround availableAnalysisandplanningNote that it is not possible to modify the decisions after the round deadline. If the team has not saved itsdecisions for a round, the system will automatically use the results of the previous round.After the introduction, the teamsfamiliarize themselves with the decisionmaking process via a practice round.The results of the practice round will nothave any influence on the actual gameresults.The instructor decides the number ofactual decision making rounds (5-12)and decision making follows the cycleon the right.
  13. 13. 13The main objective for the teams is to deliver sustainable, profitablegrowth. Typically this is measured by a ratio called “cumulative total return tothe shareholders”, which combines share price development and dividendspaid to show the total return to the shareholders.The instructor may, at his/her discretion, choose to use other criteria tomeasure the performance of the teams. For example, market shares, netinterest income, and total income growth can be used if so decided.We recommend cumulative total return to shareholders due to itscomprehensive nature. The teams may try to manipulate their profits,revenues, and market share in the short run, but share price will punish anyshort sighted decisions sooner rather than later.Main Objective & Winning Criteria
  14. 14. 14Decision making is round based. One decision making round equals onefinancial year.In the beginning of the game, so called ‘initial round results’ are available foranalysis. These can be used as a starting point for the practice rounddecisions. After the practice round, the situation is reset back to the initialstate, and decisions will be made for the first round.Decision making guide and case description should be read before thepractice round. Market outlooks should be read before each round ofdecision-making. A new market outlook containing information about themarket development becomes available as soon as the previous rounddeadline has passed.Decision Making Fundamentals I
  15. 15. 15Decisions are entered in the white cells. These will be used in the actualresults calculation.Estimations are entered in the blue cells. These will not affect resultsdirectly, but they are important because together with the decisions they formthe basis for the budgeted results.Drop-down menus are used in certain decisions where there are somespecific options to choose from.Decision Making Fundamentals IIRemember to copy the decisions as team decisions before the deadline.
  16. 16. 16New challengesThe bank’s operations have expanded from the early days to many newexciting fields of finance. Retail and small business customers are served onmany fronts and investment services and products have lately been in focus.The bank has considered other opportunities and ventures as well, and robustback office operations have been established to support efficient clientprocesses.The bank today is not anymore about taking in deposits and lending money tocreditworthy customers but about being a reliable financial adviser andpartner to all customers in all of their financial needs.Business Case I
  17. 17. 17As a response to economic turbulence, new regulations are in process ofbeing enforced in the banking sector, and this development is expected tocontinue some time. Other challenges can be seen in introduction of newinvestment services and products and following the key trends to capture themost value to shareholders, as well as in technology and increasinglycomplicated HR affairs. Furthermore, given the recent history of troublesomelending decisions, the Board is stressing that the bank should carefully assessgrowth ambitions against appropriate risk policies.Your taskThe Board has made it clear that misconduct of the past kind is notacceptable and that the profitability of the bank at the present stage is barelysatisfactory. You are expected to enhance the shareholder value as measuredby the cumulative total shareholder value more than the competing bank’s inthe industry.Business Case II
  18. 18. 18Cesim Bank OverviewSystems & Processes (Technology infrastructure support)Personnel management (Resources, management, engagement)Risk management (Controls, reporting)Treasury (Credit and equity markets, investments, central bank)Banking andinvestmentservices andproductsRetailBanking andinvestmentservices andproductsPrivateInvestmentservices andproductsInstitutionsSME bankingservices andproductsSMECorporateadvisoryservicesCorporateCustomersFront officeBack office
  19. 19. 19Summary of Service OfferingService Retail Private* Institutions* SME* Corporate*Mortgage loans x xOther loans x x xDemand deposits x x xFixed term deposits x xOther bank products x x xIn-house funds* x x x3rd party funds* x x xSecurities brokerage* x x xStructured products* x x xPortfolio management* x xAdvisory* x x*At course instructor’s discretion through case management
  20. 20. 20Banking and multitude of financial services include several elements that areunlike those found in other commercial activity and as such rudimentaryunderstanding of these functions is paramount to understanding Cesim BankSimulation as these core relationships have been built into the simulationmodel.Credit creationWhen banks create new loans to customers, most of the money returns to thesame banks as new deposits, which can then be used to create morecustomer loans with only fraction of the amount being held in compliance withminimum reserve requirements.Liquidity riskBank balance sheet’s typically include significant amounts of long term assetsand short term liabilities resulting in what is known as asset-liability maturitymismatch. This creates a unique liquidity risk amongst banks that is generallyalleviated with the help of deposit insurance arrangements.Introduction to banking I
  21. 21. 21Solvency riskBanks typically have very high financial leverage as measured bycommonplace indicators like equity ratio. Bank solvency is measured bytaking into account both the type of capital protecting against losses and thequality of the assets. Basel III decrees that banks must hold at least 4.5 percent of ’common equity tier 1 capital’ against ’risk-weighted assets’ whereCET1 capital refers to common equity and RWA to assets weighted by riskfactors. For example, cash and gold would be assigned a risk factor of 0.Bank fundingUnlike with most business, with banks, the core customer services, depositsand loans, form a significant part of the bank’s own funding structure.Central bankingCommerical banks, unlike other businesses, interface with central banks inseveral ways. Bank cash is held as reserves at the central bank, centralbank’s require certain level of minimum reserves and they act as the lender oflast resort to commercial banks if capital markets funding is unavailable.Introduction to banking II
  22. 22. 22Customer facing front office operations include Retail, SME and Corporatebanking as well as Investment services and products offered to Retail, Privateand Institutional customers.Front office operations consist of:a. Retail Banking: loans and depositsb. SME Banking: banking services to SME customersc. Corporate Banking: corporate advisory transactionsd. Investment Services: brokerage, portfolio management, advisorya. Investment Products: investment funds, structured productsFront office operations
  23. 23. 23Retail Banking is responsible for the bank’s consumer level customers andtheir traditional banking service needsConsumer banking products:a. Mortgage loansb. Consumer loansc. Demand depositsd. Fixed term depositse. Other banking products and servicesLoan products (lending)Teams are able to offer mortgage and consumer loans to both retail andprivate customers. Mortgage loans always carry collateral whereas consumerloans are mixed. Mortgage loans are offered with 1 and 3 year interestrepricing periods with maturities ranging from 15 years to 50 years whereasconsumer loans consist of a mixture of 3 and 5 year loans.Retail Banking I
  24. 24. 24Lending decisionsa. Consumer loan average margin – retail / privateb. Mortgage loan average margin – retail / private, 12 months / 3 yearsc. Maximum maturity – 10/15/20/25/30/50 yearsd. Expense to income ratio (typically circa 30 per cent)e. Loan to value ratio (typically circa 65 per cent)f. Other risk factors (from negligible to paramount)Loan demand formationThe simulated market has a certain basic demand for loans for eachcompeting bank. The average interest charges direct customer demandamongst the competing banks resulting in some level of loan applicationdemand for each of them. Teams must decide on a set of lending termscriteria for mortgage loans which is then used to screen the incomingapplication flow resulting in a fraction of the original customer demand turninginto granted mortgage loans.Retail Banking II
  25. 25. 25Deposit products (borrowing)a. Demand deposits – retail / privateb. Fixed term deposits – 12 months / 2 yearsTeams must decide on interest paid on the average balance of demand andfixed term deposits. Demand deposit rates can be set separately for retail andprivate customers. Fixed term deposits are offered for 12 months and 2 years,and the interest remains the same until maturity. The higher the interestdifferential in favor of fixed term deposits, the more customer shift funds intothose products.Other banking productsRetail and private customers are assumed to use a variety of bankingservices and products in addition to loans and deposits. These services arecovered with a single pricing decision that ranges from ‘no fees’ to ‘heavy feestructure’. At every pricing tier the upfront costs are less for the privatesegment clients.Retail Banking III
  26. 26. 26SME Banking consists of banking relationship with all business customersexcept for the largest enterprises that are considered in Corporate Bankingadvisory servicesServices and products include deposits, loans and other banking products.Teams make decisions on deposit interest rate and interest premiums onloans separately for each credit rating class. SME customers are classifiedinto separate credit rating classes indicating their overall creditworthinessranging from AAA to C, 7 in total, at the broadest setting. Teams are free toexclude some customers altogether if they so choose.In addition to the interest rate, other lending terms can be adjusted as well.These are covered by a single lending terms decision that includes factorssuch as personal guarantees, collateral and covenants. The stricter the terms,the less loans there are but of higher quality.Competitive factors include pricing, lending terms, depth of service offeringand bank image.SME Banking (optional)
  27. 27. 27Real estate lendingReal estate sector has been separate from the SME customer mass since it istypically very sensitive to changes in the business cycle. Teams are able toset lending standards separate for all real estate related lending (excludingpersonal mortgage lending).Competitive positioningTeams are able to adjust their strategy and competitive position in two ways:through service offering and sector targeting. Teams may specialize in servicedomestic or export sector which leads to increased competence and creditexposure. Furthermore teams can choose the aggregate level of their productoffering; seeking to serve the needs of all customers requires broad portfoliobut brings with it greatly increased operating costs.Case management options:a. Inclusion of the SME moduleb. Number of credit rating classesc. Naming scheme for credit rating classesSME Banking II (optional)
  28. 28. 28Corporate and investment banking business consists of advisory transactionsand general advisory on hourly basis.There are 3 types of transactions:a. Mergers & Aqcuisitionsb. Equity Capital Marketsc. Debt Capital MarketsThe service capacity is based on Corporate personnel and the remainingresources are allocated to serving customers on hourly basis on smallerassignments.Teams have the option of assigning different priorities to the aforementionedtransactions types in order to gain competitive edge through productcompetence and experience. Product prioritization makes the bank allocatemore time for attracting and serving those client needs while reducing theresources available for other customers. Single prioritization has the largesteffect while prioritizing all products carries no effect.Corporate Banking I (optional)
  29. 29. 29Factors affecting demand:a. Pricing (percentage based fee on total transaction value and hourlycharge for general advisory)b. Bank image (bank image is an important factor in relationship drivenbusiness)c. Product competence (formed overtime based on experience andspecialty prioritization)d. Product experience (completed transaction backlog, visibility as aleading bank)e. Marketing expendituref. Employee retention and compensationCase management options include:a. Inclusion of the Corporate business lineCorporate Banking II (optional)
  30. 30. 30Investment services consists of managing and marketing investment servicesto the available customer segments, and acting as a distribution channel forin-house and third party investment products.Customer segments include:a. Retailb. Privatec. InstitutionsInvestment services include:a. Portfolio management (only Private and Institutional clients)b. Financial advisory (only Private clients)c. Securities brokeraged. Sales channel for in-house and third party investment productsThe servicing capacity is based on investments personnel where insufficiencyis reflected as poor customer satisfaction and vice versa.Investment Services I (optional)
  31. 31. 31Portfolio managementPortfolio management consists of offering tailored full service wealthmanagement to private and institutional clients. The teams are not able tooffer this service to their retail customer base.For both private and institutional clients, the teams should choose finersegmentation based on the aggregate wealth of the target market’s clients.Teams may offer their service to the broadest market possible or specialize toserving the needs to the top-tier clients. The wealthiest clients tend to prefermore exclusive service providers, although that significantly reduces theaddressable market. Teams must also choose the portfolio management feefor both segments.Financial advisoryFinancial advisory services can be offered to the bank’s private clients inconjunction with portfolio management service. Teams have to decide thehourly charge for the service, and it is recommended to consider the targetedsegment when pricing the service.Investment Services II
  32. 32. 32Securities brokerageSecurities brokerage consists of offering trading services in cash andderivative instruments in equities and fixed income. These services areoffered to the bank’s entire customer base from retail customers to largestinstitutional customers. Pricing is based on monthly base fee, transaction feeand premium services fee. Private clients do not pay monthly fees, andinstitutional customers get even the premium services for free. The wealthierthe client, the more price sensitive they usually are. However, investmentservices need to be considered together with the bank’s total offering.Case management options:a. Inclusion of the entire business lineb. Private segmentc. Institutions segmentd. Portfolio managemente. Brokerage servicesInvestment Services III
  33. 33. 33Investment products consists of managing and developing investmentproducts for marketing to the bank’s customer base.The products include:a. In-house investment fundsb. Third party investment fundsc. Structured productsIn-house investment funds IIn house investment funds consits of three common funds across allcompeting banks and the ability to launch up to five (5) new funds asspecified by the teams.For all funds, teams must decide the asset management fee charged on NAVor net asset value and whether to outsource the management or not. In theformer case, asset management fee is split between the team’s bank and theoutside manager. Outsourcing option is the most beneficial for exotic funds.Investment Products I (optional)
  34. 34. 34In-house investment funds IIFor new funds, teams must specify the desired fund class, sub class andgeographical target market. Options include equity and fixed income fundswith several sub-classes for both, as well as several target markets with allpossible combinations thereof being available. It is most beneficial to launchfunds that have no direct competitors in the market and on the other handhave strong customer interest indicated.Third party investment fundsThird party funds consist of up to five (5) possible partner managers, whoseselection of funds can be offered to the bank’s customer base. Thesepartnerships involve startup costs, and success based fees paid back to thebank depending on how much capital is attracted to aforementioned funds.Offering third party funds might weaken demand for the banks own selectionof funds.Investment Products II
  35. 35. 35Structured productsThe wealth of options available for investors consists of far more than simpleinvestment funds and this is reflected in the team’s ability to decide on thebreath of structured product selection ranging from abstaining from themarket completely to broad and innovative offering. Broader offering incursmore management costs but attracts more customer capital. Importantly,some of these products put the bank’s own capital at risk and as such morerobust risk management controls are recommended.Case management options:a. Inclusion of investment productsb. Ability to launch new investment fundsc. Third party investment fundsd. Structured productsInvestment Products III
  36. 36. 36In addition to client facing front office operations, the Cesim Bank Simulationcovers a range of supporting back office operations.Back office operations consist of:a. Personnel Management: sufficiency of personnelb. Systems & Processes: investment into infrastructurec. Risk Management: risk managementa. Treasury: credit and equity markets, treasury investments, central bankBack Office Operations
  37. 37. 37The personnel management function consists of managing the sufficiencyof sales and support personnel in all the bank’s departments includingretail, sme, corporate, investments and back office (including management)and determining appropriate personnel policies related to compensation,training and engagement.Hiring / LayoffsTeams need to hire employees to each of the bank’s department according tocustomer service needs and marketing intentions. Teams choose the numberof people they will have in each department for each round. Any additionalhiring or redundancies take place immediately and the desired number ofemployees is always available. Certain fraction of people, indicated by theturnover percentage, leave the bank each period without any associatedredundancy costs whereas hiring and layoffs do incur additional personnelcosts.Personnel Management I
  38. 38. 38Sales & Support resourcesImmediate customer service and support needs require certain level ofminimum resources. In addition to this time is consumed in variousmiscellaneous activities such as personnel engagement, training etc.Importantly, the resources in excess of aforementioned requirements arespent in various value adding activities such as customer prospecting,relationship management and internal development, depending on thedepartment.Personnel policies:Personnel policies include compensation, training and HR development.Compensation includes decisions for basic compensation as well as incentivepay in either pre-set profitability based or freely set profit share based.Training is administered by choosing the level of funds and priority areas,which can be used to target problem spots or key concerns. HR developmentpolicies allow the teams to decide how important personnel management is totheir bank’s goal. While it requires more time and money in the short term, ityields lasting benefits over the long term.Personnel Management II
  39. 39. 39Investment options include:a. Internet banking servicesb. Banking product developmentc. Customer service processes and experienceThe more you invest the higher quality results you will achieve. However,decreasing marginal benefits apply. Higher levels of competence lead tohigher demand across the bank’s services and products.Systems developmentSystems development deals with the bank’s basic IT infrastructure andsystems. The development decision is made for the pace of adoption of newtechnology. Tech bellwethers are fastest at adopting the latest technologyinnovations but have to pay the highest cost for them. Laggards concentrateon observing others and only adopt proven solutions that yield the mostbenefits once the costs have come down. Higher levels of competence andtechnology leadership bring down operating costs and reduce operationalrisks.Systems & Processes
  40. 40. 40The risk management function deals with risk identification, quantification andprioritization and insituting proper controls, policies and reporting of theaforementioned issues within the bank.Risk management policiesTeams must make policy decisions regarding internal risk managementcontrols and external risk reporting. Internal risk management policy dealswith recognizing, quantifying, prioritizing and communicating risks within thebank. More rigorous processes increase costs but reduce the likelihood ofmishaps in most bank operations.External risk reporting policies deal with communicating the bank’s risk statusto outside interest parties such as regulators, debt and equity investors andthe general public. Transparent and extensive reporting promotes good bankimage and yields a multitude of subtle benefits across the organization.Risk Management I
  41. 41. 41Interest rate risk managementA core risk management issue in banking is the interest rate risk thatemanates from asset-liability mismatch in interest rate sensitive assets andliabilities. For example, if a bank has twice as many assets with a one yearrepricing period as it has liabilities, a decrease in interest rate has a negativeimpact on the bank’s cash flows, and vice versa. This risk can be hedged byderivative instruments, and the decision is made by choosing the degree ofhedging.Core risk factors in bankinga. Credit riskb. Interest rate riskc. Liquidity riskd. Solvency riske. FX riskf. Market riskg. Operational riskRisk Management II
  42. 42. 42Bank regulatory issues typically fall under structure, solvency and liquidity.In Cesim Bank Simulation we have included:a. Central bank minimum reserve requirementsb. BASEL III based solvency requirementsThe central bank in the simulation requires the competing banks to deposit acertain fraction of their short term liabilities with the central bank at the end ofeach period to adhere to minimum requirements.According to Basel III solvency requirements, banks must hold certainfractions of their risk weighted assets as Common Equity Tier 1 capital, Tier1 capital and Total capital. Furthermore, profit distribution is limited by anadditional conservation margin. These concepts have been built into theCesim Bank Simulation.Bank Regulatory Issues
  43. 43. 43Bank balance sheet and fundingIn banking the customer-facing product and sales decisions, borrowing andlending, form a core part of the funding of the enterprise and management ofthe balance sheet.Bank Treasury I0102030405060708090Assets LiabilitiesAssetsCash and reservesInvestment assetsBusiness loansConsumer loansMortgage loansTangible assetsIntangible assetsLiabilitiesCentral bankDemand depositsFixed term depositsBondsSubordinated debtEquityBank funding is divided intocore deposits (demand andfixed term) and managedliabilities (interbank, capitalmarkets, central bank). Equitytypically covers a very smallfraction of funding needs.Assets tend to be very long-term (mortgages) while liabilities(demand deposit) are short term givingrise to significant liquidity risk
  44. 44. 44The goal of the financing decisions is to minimize the cost of funding to thebank and to return capital to the equity holders. Decisions that are availableinclude:a. New senior and subordinate bond issueb. Share issue and repurchasec. Dividend paymentd. Treasury investmentsCredit marketsBanks can raise long term debt financing from capital markets by issuingeither a) new senior bonds or b) new subordinate bonds. Both debtinstruments have a five year maturity and a fixed interest rate. The interestrate is based on the bank’s public credit rating.Senior bonds rank higher in the bank’s capital structure, but subordinatebonds can be counted against regulatory requirements on total capital,because they are included in Tier 2 capital.Bank Treasury II
  45. 45. 45Equity MarketsFinancingNew shares can be issued to raise equity financing. Solvency regulationsdecree a certain level of regulatory capital to be sustained at all times. Theissue price is based on market valuation at the beginning of the round, andthe number of shares issued affects the issue price linearly.Profit distributionDividend payments and share repurchase can be used to return earnings tothe shareholders, assuming the company has retained its earnings andconforms to solvency regulations including the capital conservation buffer.The repurchase price is based on market valuation at the beginning of theround, and the size of the repurchase affects the issue price linearly.Bank Treasury III
  46. 46. 46Treasury investmentsThe teams can manage the bank’s balance sheet by investing certain fractionof the bank’s assets into domestic or foreign treasury bonds. These carryhigher risk and return expectations than deposits with the central bank. Inaddition, foreign bonds incur FX risk.Central bank operationsThe lender of the last resort in the Cesim Bank simulation is a central bank.This means that all emerging funding gaps are covered by automaticallytaking short term loans from the central bank. The central bank funding is two-tiered; there is a limited amount of funding available through the credit facility,but needs in excess of this are covered from the emergency funding programthat carries a higher interest rate.The central bank also required certain amount of minimum reserves to bedeposited with it at all times. In addition excess cash funds are held with thecentral bank as excess reserves in the deposit facility.Bank Treasury IV
  47. 47. 47ProjectionsProjections can be launched from the bottom of the page and they consist of incomestatement, balance sheet, segment based income statement and loan book. Inaddition, projections include key parameters for current and previous periods.Current round figures update continuously as decisions are made. Actualized figuresfor the previous round are shown on the right.
  48. 48. 48Net interest margin, % = Net interest income / Interest incomeIndicates the bank’s ability to generate value from its core operations, borrowing andlending. Calculated as interest income less interest cost divided by interest income. Allbalance sheet items that generate interest income or costs are taken into account.Cost / Income ratio = Total non-interest costs / Total incomeIndicates the bank ability to cover it operational costs with the income from its operations.Calculated as total non-interest costs divided by total income.Common Equity Tier 1 ratio, % = CET1 capital / Total risk weighted assetsIndicates the bank’s financial leverage and solvency risk by taking into considerationamount and type of capital as well as riskiness of assets on balance sheet as required byregulatory standards. CET1 includesTier 1 ratio, % = CET1 + Other Tier 1 capital / Total risk weighted assetsIndicates the bank’s financial leverage and solvency risk by taking into considerationamount and type of capital as well as riskiness of assets on balance sheet as required byregulatory standards.Bank Specific Financial Ratios I
  49. 49. 49Total Capital ratio, % = Tier 1 + Tier 2 Capital (subordinated debt) / Total riskweighted assetsIndicates the bank’s financial leverage and solvency risk by taking into considerationamount and type of capital as well as riskiness of assets on balance sheet as required byregulatory standards.Risk weighted assets = All assets on balance sheet weighted with individual riskfactorsRisk weighted assets calculation standardizes the risk inherent in the different balancesheet items on the bank’s balance sheet. This is required to better understand theamount of capital that should be held against bank’s total assets, because the riskassociated with for example central bank reservers, gold, long-term customer loans,treasury bonds and real estate is very different.Rate sensitive assets and liabilitiesRate sensitive assets and liabilities refer to balance sheet items that are based onadjustable interest rates and whose cash flows can change over time.Bank Specific Financial Ratios II
  50. 50. 50Profit before taxes, % = Profit before taxes / Total incomeIndicates the bank’s ability to generate profits from its operations. Profit before taxes iscalculated after customer credit impairments.Net margin, % = Profit for the period / Total incomeIndicates the bank’s ability to generate profits for the shareholders from its operations.Calculated as profit for the period divided by total income.Return on equity, ROE % = Profit for the period / Average shareholders’ equityIndicates the return that the bank earns to its shareholders.Return on assets (ROA) % = Earning before interest and taxes / Average TotalassetsIndicates the bank’s ability to generate returns with all of its assets.Equity ratio = Total Shareholder’s equity / Total assetsIndicates the bank’s financial leverage, i.e., what proportion of assets are financed withcommon equity.Key Financial Ratios I
  51. 51. 51Key Financial Ratios IIEPS (Earnings per share) = Profit for the period / Number of shares outstandingDividend yield-% = Dividend per share / Share priceIndicates the annual percentage of return that the current level of dividend provides tothe investor, as compared to the current share priceP/E = Market value per share / EPSP/E indicates how many years it takes with the current level of earnings to pay the priceof one share. High P/E ratio usually implies high growth expectations and vice versa.P/B = Market capitalization / Shareholders’ equityIndicates the financial markets’ perception of the true value of the bank’s equitycompared to its book value.Cumulative total shareholder return, % (winning criteria)   1%1001 periodthispriceshareperiodinitialshareperdividendscumulativepricesharecurrentThe concept of total shareholder return is explained on the next slide
  52. 52. 52Cumulative Total Shareholder Return is the average annualizedpercentage return that a company delivers to its shareholders during thewhole simulation. It takes into account the changes in the company’sshare price and cumulative dividend payments.Example:1. No dividends. Let’s say that the share price in the beginning of thegame is 10EUR, and after one round (=year) the share price is12EUR. This gives 20% return to shareholders for that given year.2. With dividends. In addition to the above, the company pays a 1EURdividend per share during the round. Total return is (12+1)/10 = 30%In the previous we assumed that the change happened over one round.The same principle applies for multiple rounds. In that case we addcumulative dividends to the share price and annualize the return. Forexample, 30% cumulative return over three years would be 9%annualized return on average.Cumulative Total ShareholderReturn % p.a.
  53. 53. 53Decision ChecklistOn the decision checklist page all team members’ decisions can be seen side byside. By pressing ’copy’ a team member’s decisions are moved to the team decisioncolumn. At the deadline, the system reads the decisions from the team decisioncolumn and calculates results for the round.Team decisions can be accessed and consequently edited directly by pressing ’go’ inthe team column.Note that previous round decisions will be used if there are no saved decisions forthe round.Also historical decisions for any team member can be accessed by choosing therespective round from the dropdown menu.
  54. 54. 54After each round the system generates reports that depict the results of eachteam in a particular market.Results consist of:a. Summary report with a set of chartsb. Business line reports for Retail, SME and Corporate banking, andFinancial services and productsc. Back office reports for Personnel, Systems and Risk managementd. Financial statements; including an income statement with aseparate statement of comprehensive income and a balance sheete. Financial ratios; including share price info and key financialindicatorsf. Banking sector report portraying the development of the industryResults provide useful information about a team’s own sales, operations, andfinances. In addition, results can be used to benchmark performance with thecompeting teams in the same market.Results I
  55. 55. 55AnalyzersSome results reports include additional information only available in theInstructor Results view. We call these analyzers, and they typically offer moreinsight into the formation of results by for example detailing result itemsubcomponents etc.Results II
  56. 56. 56CesimArkadiankatu 21 A00100 Helsinki, FinlandTel. +358 9 406 660www.cesim.comcontact@cesim.comTechnical Supportsupport@cesim.comMore Information

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