Stanford Bank Game:
(Note: the following info is subject to testing on future exams & quizzes)
First set of decisions due: Wednesday, March 7th, by 5PM (under office door: 116C Upham)
Questions on SBG specifics due: Wednesday, March 21st, by midnight (under office door by 5PM, or by email attachment)
Case write-up due: T.B.A.
1) Recommended: Allocate effort among group members. Allocation of effort may be by specific decisions (pages in the SBG manual), or by topic area such as:
a. Interest Rate risk management
b. Lending policies
c. Liabilities
d. Liquidity risk (decisions that make balance sheet balance)
e. Securities portfolio
f. Allocation of officer effort
g. Analysis of financial ratios
h. Analysis of competitive position
2) READ THE SBG MANUAL before making decisions. RE-READ the SBG manual periodically throughout the semester. Assign areas of focus for team members. The game will be played for four total input periods (4 quarters of SBG time. The third and fourth periods will be played on a competitive basis relative to other SBG banks.)
3) Pay particular attention to the consequences of cutting a dividend.
4) Prepare a copy of the decision data from the period 2.1 input data (prior to your “inheritance” of the bank) so that you have a quick reference for the typical magnitude of the numbers for the decision form.
5) Perform analysis throughout the simulation, and base your decisions on your analysis. This will lead to more informed decisions, and ultimately, a higher grade for the project as you will have a means to justify your decisions.
6) Keep in mind that if you sell securities from your bank’s holdings, you will incur a capital loss of MV < BV for that security. If you need to increase cash inflows subsequent to i-rate increases, sell current loans, not old loans.
7) Interest rates vary throughout the simulation. What might be a low interest rate in one period could be a very high interest rate in the next period, if interest rates decline, in general. Use the interest rate spread around “all banks in the economy at present” for your benchmark.
8) Initially, it may pay to experiment with some of your decisions (i.e., go with a relatively high rate in one type of commercial loan, and a relatively low rate in another type of commercial loan), to get a sense of the tradeoffs and sensitivities in the model. If you can increase rates on assets, and loan volume does not decline by much, it’s likely to be worth doing so. Otherwise, you may need to re-assess this decision.
9) Double-check your input data to make sure you’re not off by a magnitude of 10 or 100.
10) The success of your bank depends, in part, on your pursuit of an efficient strategy, and your ability to find “windows of opportunity” in the data. Take a hint from the SBG manual. I.E., if the SBG author implies certain rates are too high (low), you should probably decrease (increase) them!
11) Pay attention to sources and uses of funds. If you plan to execute a strategy designed to increase assets, have a plan to increase liabilities (and equity) to fund the “use of funds” occurring with the increase in assets.
12) CDs purchased are a source of funds.
13) Fed funds purchased is a very expensive source of funds – particularly if your capital adequacy ratio is low.
14) Draw on info from economics or other finance classes when making your decisions – but pay attention to information provided in the SBG manual.
15) Selling futures is typically a “hedge” of overall interest rate risk (position profits when i-rates increase). The reverse is true of buying futures. If you both buy and sell futures in the same quarter, the net result is the same as taking the difference of your purchase and sales. (I.e. if you buy 100 and sell 40 – this is the same as buying 60 – except you will likely incur greater transaction costs.) Selling or buying large quantities of futures contracts is considered high-risk, and will temporarily increase your bank’s equity requirements.
16) Grade: 20% questions on SBG specifics; 20% presentation; 60% comprehensive questions and write-up of case.