Cesim Bank Banking and Financial Services Management Simulation Game Guide Book

CESIM BANK SIMULATION
Introduction
Simulation for banking and financial
services

2
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.
The task for the participating teams is to manage a bank with several front
and back office operations in a single geographical market. In the role of a
bank manager, the teams will be responsible for retail and SME clients,
lending and borrowing, front office and back office, and customers with
deposits, mortgages and investments. They’ll have personnel to manage, IT
systems to develop, regulators to report to and capital markets to raise
financing from, provided that they are pleased with the way the bank is
managed.
What is Cesim Bank Simulation?

3
Key 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 managed
liabilities.
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 to
Basel III.
f. Bank specific terminology and results presentation including many unique
financial 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 their
interconnectedness.
Learning Goals

4
Learning Process
Applying new ideas
Analysis & planning
Observations & reflections
Results & teamwork
Generalizing from the
experience
Lectures & discussion
Concrete experience
Decision making

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Targeted at
Educational sector Financial services industry
a. Introduce banking to participants in a
new, much more engaging way
b. Allow the participants to learning
complex banking issues by making
them in charge of their own bank and
compete against their peers
c. Content configuration options allow for
targeting optimal learning outcomes
a. Illustrate core banking topics
b. Demonstrate the interaction of different
banking functions in a competitive
environment or key initiatives in a
simulated, yet familiar setting
c. Broad range of customization
possibilities out of the box
d. Great platform for custom development

6
The simulation is completely web based. There is no need to install any
separate applications and the simulation can be accessed from any computer
that 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 make
decisions and scenarios on their own and later combine the outcomes with
the other team members on the [decision checklist] -page.
The platform also includes a communications forum that can be used to
communicate within teams and between all teams in one market.
Web Based Solution

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The 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 market
Simulation Platform Structure

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Each 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 to
utilize the simulation for any number of students in the class.
All teams are starting from exactly the same position, with similar market
shares and profits. Equally, teams will face the same market conditions during
the simulation.
Note that the teams compete against other teams in their own market,
not against a computer. The decisions of each team influences the other
teams’ results and the market development overall.
Simulation Organization

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As an instructor you have significant discretion over the basic structure of the
simulation market. By default, all Cesim Bank Simulation courses are set to
include a limited set of functionality that can nonetheless be complemented
through [Case management]
If you want to make changes to your course, you need to go to [Case
management] – page and click tab ”Your parameter sets”. Then follow these
steps:
1. Click ”Create new simulation parameters” and name it. The parameters
now appear under ”Your parameter sets”
2. Click ”Parameters” and click the box Modules
3. Activate desired feature set
4. Go back to [Case management], choose tab ”Apply parameters to
groups]” and click ”Assign”
Note that you can also change all the other parameters with the same steps
as presented above.
Course Options I

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The course options available through Case Management include:
a. Private customer segment
b. Institutions customer segment
c. SME banking
d. Number of SME credit rating classes
e. Corporate banking
f. Investment services and products
g. Brokerage services
h. Portfolio management services
i. Ability to create new investment fund products
j. Third party investment funds
k. Structured products
l. Systems & Processes operations
Furthermore, the following options are available:
a. Naming of SME credit rating classes, partnership asset managers and
investment fund classes
b. Domestic and foreign currencies
Course Options II

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1. 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 time
zone.
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 required
you must enter a valid code. Otherwise the registration will not continue.)
click <next>
5. Choose your Group and Team. Group equals one world where a
maximum 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

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Flow of Operations
Introduction
Practice
Round
Strategy and
Objectives
Decision
making (x 5 – 12)
Conclusion
and Analysis
Decision making with
the web interface
System
calculates
the results automatically
at the given deadline
Results from the
previous round and
market info for the new
round available
Analysis
and
planning
Note that it is not possible to modify the decisions after the round deadline. If the team has not saved its
decisions for a round, the system will automatically use the results of the previous round.
After the introduction, the teams
familiarize themselves with the decision
making process via a practice round.
The results of the practice round will not
have any influence on the actual game
results.
The instructor decides the number of
actual decision making rounds (5-12)
and decision making follows the cycle
on the right.

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The main objective for the teams is to deliver sustainable, profitable
growth. Typically this is measured by a ratio called “cumulative total return to
the shareholders”, which combines share price development and dividends
paid to show the total return to the shareholders.
The instructor may, at his/her discretion, choose to use other criteria to
measure the performance of the teams. For example, market shares, net
interest income, and total income growth can be used if so decided.
We recommend cumulative total return to shareholders due to its
comprehensive nature. The teams may try to manipulate their profits,
revenues, and market share in the short run, but share price will punish any
short sighted decisions sooner rather than later.
Main Objective & Winning Criteria

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Decision making is round based. One decision making round equals one
financial year.
In the beginning of the game, so called ‘initial round results’ are available for
analysis. These can be used as a starting point for the practice round
decisions. After the practice round, the situation is reset back to the initial
state, and decisions will be made for the first round.
Decision making guide and case description should be read before the
practice round. Market outlooks should be read before each round of
decision-making. A new market outlook containing information about the
market development becomes available as soon as the previous round
deadline has passed.
Decision Making Fundamentals I

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Decisions are entered in the white cells. These will be used in the actual
results calculation.
Estimations are entered in the blue cells. These will not affect results
directly, but they are important because together with the decisions they form
the basis for the budgeted results.
Drop-down menus are used in certain decisions where there are some
specific options to choose from.
Decision Making Fundamentals II
Remember to copy the decisions as team decisions before the deadline.

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New challenges
The bank’s operations have expanded from the early days to many new
exciting fields of finance. Retail and small business customers are served on
many fronts and investment services and products have lately been in focus.
The bank has considered other opportunities and ventures as well, and robust
back office operations have been established to support efficient client
processes.
The bank today is not anymore about taking in deposits and lending money to
creditworthy customers but about being a reliable financial adviser and
partner to all customers in all of their financial needs.
Business Case I

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As a response to economic turbulence, new regulations are in process of
being enforced in the banking sector, and this development is expected to
continue some time. Other challenges can be seen in introduction of new
investment services and products and following the key trends to capture the
most value to shareholders, as well as in technology and increasingly
complicated HR affairs. Furthermore, given the recent history of troublesome
lending decisions, the Board is stressing that the bank should carefully assess
growth ambitions against appropriate risk policies.
Your task
The Board has made it clear that misconduct of the past kind is not
acceptable and that the profitability of the bank at the present stage is barely
satisfactory. You are expected to enhance the shareholder value as measured
by the cumulative total shareholder value more than the competing bank’s in
the industry.
Business Case II

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Cesim Bank Overview
Systems & Processes (Technology infrastructure support)
Personnel management (Resources, management, engagement)
Risk management (Controls, reporting)
Treasury (Credit and equity markets, investments, central bank)
Banking and
investment
services and
products
Retail
Banking and
investment
services and
products
Private
Investment
services and
products
Institutions
SME banking
services and
products
SME
Corporate
advisory
services
CorporateCustomers
Front office
Back office

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Summary of Service Offering
Service Retail Private* Institutions* SME* Corporate*
Mortgage loans x x
Other loans x x x
Demand deposits x x x
Fixed term deposits x x
Other bank products x x x
In-house funds* x x x
3rd party funds* x x x
Securities brokerage* x x x
Structured products* x x x
Portfolio management* x x
Advisory* x x
*At course instructor’s discretion through case management

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Banking and multitude of financial services include several elements that are
unlike those found in other commercial activity and as such rudimentary
understanding of these functions is paramount to understanding Cesim Bank
Simulation as these core relationships have been built into the simulation
model.
Credit creation
When banks create new loans to customers, most of the money returns to the
same banks as new deposits, which can then be used to create more
customer loans with only fraction of the amount being held in compliance with
minimum reserve requirements.
Liquidity risk
Bank balance sheet’s typically include significant amounts of long term assets
and short term liabilities resulting in what is known as asset-liability maturity
mismatch. This creates a unique liquidity risk amongst banks that is generally
alleviated with the help of deposit insurance arrangements.
Introduction to banking I

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Solvency risk
Banks typically have very high financial leverage as measured by
commonplace indicators like equity ratio. Bank solvency is measured by
taking into account both the type of capital protecting against losses and the
quality of the assets. Basel III decrees that banks must hold at least 4.5 per
cent of ’common equity tier 1 capital’ against ’risk-weighted assets’ where
CET1 capital refers to common equity and RWA to assets weighted by risk
factors. For example, cash and gold would be assigned a risk factor of 0.
Bank funding
Unlike with most business, with banks, the core customer services, deposits
and loans, form a significant part of the bank’s own funding structure.
Central banking
Commerical banks, unlike other businesses, interface with central banks in
several ways. Bank cash is held as reserves at the central bank, central
bank’s require certain level of minimum reserves and they act as the lender of
last resort to commercial banks if capital markets funding is unavailable.
Introduction to banking II

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Customer facing front office operations include Retail, SME and Corporate
banking as well as Investment services and products offered to Retail, Private
and Institutional customers.
Front office operations consist of:
a. Retail Banking: loans and deposits
b. SME Banking: banking services to SME customers
c. Corporate Banking: corporate advisory transactions
d. Investment Services: brokerage, portfolio management, advisory
a. Investment Products: investment funds, structured products
Front office operations

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Retail Banking is responsible for the bank’s consumer level customers and
their traditional banking service needs
Consumer banking products:
a. Mortgage loans
b. Consumer loans
c. Demand deposits
d. Fixed term deposits
e. Other banking products and services
Loan products (lending)
Teams are able to offer mortgage and consumer loans to both retail and
private customers. Mortgage loans always carry collateral whereas consumer
loans are mixed. Mortgage loans are offered with 1 and 3 year interest
repricing periods with maturities ranging from 15 years to 50 years whereas
consumer loans consist of a mixture of 3 and 5 year loans.
Retail Banking I

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Lending decisions
a. Consumer loan average margin – retail / private
b. Mortgage loan average margin – retail / private, 12 months / 3 years
c. Maximum maturity – 10/15/20/25/30/50 years
d. 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 formation
The simulated market has a certain basic demand for loans for each
competing bank. The average interest charges direct customer demand
amongst the competing banks resulting in some level of loan application
demand for each of them. Teams must decide on a set of lending terms
criteria for mortgage loans which is then used to screen the incoming
application flow resulting in a fraction of the original customer demand turning
into granted mortgage loans.
Retail Banking II

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Deposit products (borrowing)
a. Demand deposits – retail / private
b. Fixed term deposits – 12 months / 2 years
Teams must decide on interest paid on the average balance of demand and
fixed term deposits. Demand deposit rates can be set separately for retail and
private customers. Fixed term deposits are offered for 12 months and 2 years,
and the interest remains the same until maturity. The higher the interest
differential in favor of fixed term deposits, the more customer shift funds into
those products.
Other banking products
Retail and private customers are assumed to use a variety of banking
services and products in addition to loans and deposits. These services are
covered with a single pricing decision that ranges from ‘no fees’ to ‘heavy fee
structure’. At every pricing tier the upfront costs are less for the private
segment clients.
Retail Banking III

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SME Banking consists of banking relationship with all business customers
except for the largest enterprises that are considered in Corporate Banking
advisory services
Services and products include deposits, loans and other banking products.
Teams make decisions on deposit interest rate and interest premiums on
loans separately for each credit rating class. SME customers are classified
into separate credit rating classes indicating their overall creditworthiness
ranging from AAA to C, 7 in total, at the broadest setting. Teams are free to
exclude 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 factors
such 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 offering
and bank image.
SME Banking (optional)

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Real estate lending
Real estate sector has been separate from the SME customer mass since it is
typically very sensitive to changes in the business cycle. Teams are able to
set lending standards separate for all real estate related lending (excluding
personal mortgage lending).
Competitive positioning
Teams are able to adjust their strategy and competitive position in two ways:
through service offering and sector targeting. Teams may specialize in service
domestic or export sector which leads to increased competence and credit
exposure. Furthermore teams can choose the aggregate level of their product
offering; seeking to serve the needs of all customers requires broad portfolio
but brings with it greatly increased operating costs.
Case management options:
a. Inclusion of the SME module
b. Number of credit rating classes
c. Naming scheme for credit rating classes
SME Banking II (optional)

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Corporate and investment banking business consists of advisory transactions
and general advisory on hourly basis.
There are 3 types of transactions:
a. Mergers & Aqcuisitions
b. Equity Capital Markets
c. Debt Capital Markets
The service capacity is based on Corporate personnel and the remaining
resources are allocated to serving customers on hourly basis on smaller
assignments.
Teams have the option of assigning different priorities to the aforementioned
transactions types in order to gain competitive edge through product
competence and experience. Product prioritization makes the bank allocate
more time for attracting and serving those client needs while reducing the
resources available for other customers. Single prioritization has the largest
effect while prioritizing all products carries no effect.
Corporate Banking I (optional)

29
Factors affecting demand:
a. Pricing (percentage based fee on total transaction value and hourly
charge for general advisory)
b. Bank image (bank image is an important factor in relationship driven
business)
c. Product competence (formed overtime based on experience and
specialty prioritization)
d. Product experience (completed transaction backlog, visibility as a
leading bank)
e. Marketing expenditure
f. Employee retention and compensation
Case management options include:
a. Inclusion of the Corporate business line
Corporate Banking II (optional)

30
Investment services consists of managing and marketing investment services
to the available customer segments, and acting as a distribution channel for
in-house and third party investment products.
Customer segments include:
a. Retail
b. Private
c. Institutions
Investment services include:
a. Portfolio management (only Private and Institutional clients)
b. Financial advisory (only Private clients)
c. Securities brokerage
d. Sales channel for in-house and third party investment products
The servicing capacity is based on investments personnel where insufficiency
is reflected as poor customer satisfaction and vice versa.
Investment Services I (optional)

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Portfolio management
Portfolio management consists of offering tailored full service wealth
management to private and institutional clients. The teams are not able to
offer this service to their retail customer base.
For both private and institutional clients, the teams should choose finer
segmentation based on the aggregate wealth of the target market’s clients.
Teams may offer their service to the broadest market possible or specialize to
serving the needs to the top-tier clients. The wealthiest clients tend to prefer
more exclusive service providers, although that significantly reduces the
addressable market. Teams must also choose the portfolio management fee
for both segments.
Financial advisory
Financial advisory services can be offered to the bank’s private clients in
conjunction with portfolio management service. Teams have to decide the
hourly charge for the service, and it is recommended to consider the targeted
segment when pricing the service.
Investment Services II

32
Securities brokerage
Securities brokerage consists of offering trading services in cash and
derivative instruments in equities and fixed income. These services are
offered to the bank’s entire customer base from retail customers to largest
institutional customers. Pricing is based on monthly base fee, transaction fee
and premium services fee. Private clients do not pay monthly fees, and
institutional customers get even the premium services for free. The wealthier
the client, the more price sensitive they usually are. However, investment
services need to be considered together with the bank’s total offering.
a. Inclusion of the entire business line
b. Private segment
c. Institutions segment
d. Portfolio management
e. Brokerage services
Investment Services III

33
Investment products consists of managing and developing investment
products for marketing to the bank’s customer base.
The products include:
a. In-house investment funds
b. Third party investment funds
c. Structured products
In-house investment funds I
In house investment funds consits of three common funds across all
competing banks and the ability to launch up to five (5) new funds as
specified by the teams.
For all funds, teams must decide the asset management fee charged on NAV
or net asset value and whether to outsource the management or not. In the
former case, asset management fee is split between the team’s bank and the
outside manager. Outsourcing option is the most beneficial for exotic funds.
Investment Products I (optional)

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In-house investment funds II
For new funds, teams must specify the desired fund class, sub class and
geographical target market. Options include equity and fixed income funds
with several sub-classes for both, as well as several target markets with all
possible combinations thereof being available. It is most beneficial to launch
funds that have no direct competitors in the market and on the other hand
have strong customer interest indicated.
Third party investment funds
Third party funds consist of up to five (5) possible partner managers, whose
selection of funds can be offered to the bank’s customer base. These
partnerships involve startup costs, and success based fees paid back to the
bank depending on how much capital is attracted to aforementioned funds.
Offering third party funds might weaken demand for the banks own selection
of funds.
Investment Products II

35
Structured products
The wealth of options available for investors consists of far more than simple
investment funds and this is reflected in the team’s ability to decide on the
breath of structured product selection ranging from abstaining from the
market completely to broad and innovative offering. Broader offering incurs
more management costs but attracts more customer capital. Importantly,
some of these products put the bank’s own capital at risk and as such more
robust risk management controls are recommended.
a. Inclusion of investment products
b. Ability to launch new investment funds
c. Third party investment funds
d. Structured products
Investment Products III

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In addition to client facing front office operations, the Cesim Bank Simulation
covers a range of supporting back office operations.
Back office operations consist of:
a. Personnel Management: sufficiency of personnel
b. Systems & Processes: investment into infrastructure
c. Risk Management: risk management
a. Treasury: credit and equity markets, treasury investments, central bank
Back Office Operations

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The personnel management function consists of managing the sufficiency
of sales and support personnel in all the bank’s departments including
retail, sme, corporate, investments and back office (including management)
and determining appropriate personnel policies related to compensation,
training and engagement.
Hiring / Layoffs
Teams need to hire employees to each of the bank’s department according to
customer service needs and marketing intentions. Teams choose the number
of people they will have in each department for each round. Any additional
hiring or redundancies take place immediately and the desired number of
employees is always available. Certain fraction of people, indicated by the
turnover percentage, leave the bank each period without any associated
redundancy costs whereas hiring and layoffs do incur additional personnel
costs.
Personnel Management I

38
Sales & Support resources
Immediate customer service and support needs require certain level of
minimum resources. In addition to this time is consumed in various
miscellaneous activities such as personnel engagement, training etc.
Importantly, the resources in excess of aforementioned requirements are
spent in various value adding activities such as customer prospecting,
relationship management and internal development, depending on the
department.
Personnel policies:
Personnel policies include compensation, training and HR development.
Compensation includes decisions for basic compensation as well as incentive
pay 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 development
policies allow the teams to decide how important personnel management is to
their bank’s goal. While it requires more time and money in the short term, it
yields lasting benefits over the long term.
Personnel Management II

39
Investment options include:
a. Internet banking services
b. Banking product development
c. Customer service processes and experience
The more you invest the higher quality results you will achieve. However,
decreasing marginal benefits apply. Higher levels of competence lead to
higher demand across the bank’s services and products.
Systems development
Systems development deals with the bank’s basic IT infrastructure and
systems. The development decision is made for the pace of adoption of new
technology. Tech bellwethers are fastest at adopting the latest technology
innovations but have to pay the highest cost for them. Laggards concentrate
on observing others and only adopt proven solutions that yield the most
benefits once the costs have come down. Higher levels of competence and
technology leadership bring down operating costs and reduce operational
risks.
Systems & Processes

40
The risk management function deals with risk identification, quantification and
prioritization and insituting proper controls, policies and reporting of the
aforementioned issues within the bank.
Risk management policies
Teams must make policy decisions regarding internal risk management
controls and external risk reporting. Internal risk management policy deals
with recognizing, quantifying, prioritizing and communicating risks within the
bank. More rigorous processes increase costs but reduce the likelihood of
mishaps in most bank operations.
External risk reporting policies deal with communicating the bank’s risk status
to outside interest parties such as regulators, debt and equity investors and
the general public. Transparent and extensive reporting promotes good bank
image and yields a multitude of subtle benefits across the organization.
Risk Management I

41
Interest rate risk management
A core risk management issue in banking is the interest rate risk that
emanates from asset-liability mismatch in interest rate sensitive assets and
liabilities. For example, if a bank has twice as many assets with a one year
repricing period as it has liabilities, a decrease in interest rate has a negative
impact on the bank’s cash flows, and vice versa. This risk can be hedged by
derivative instruments, and the decision is made by choosing the degree of
hedging.
Core risk factors in banking
a. Credit risk
b. Interest rate risk
c. Liquidity risk
d. Solvency risk
e. FX risk
f. Market risk
g. Operational risk
Risk Management II

42
Bank regulatory issues typically fall under structure, solvency and liquidity.
In Cesim Bank Simulation we have included:
a. Central bank minimum reserve requirements
b. BASEL III based solvency requirements
The central bank in the simulation requires the competing banks to deposit a
certain fraction of their short term liabilities with the central bank at the end of
each period to adhere to minimum requirements.
According to Basel III solvency requirements, banks must hold certain
fractions of their risk weighted assets as Common Equity Tier 1 capital, Tier
1 capital and Total capital. Furthermore, profit distribution is limited by an
additional conservation margin. These concepts have been built into the
Cesim Bank Simulation.
Bank Regulatory Issues

43
Bank balance sheet and funding
In banking the customer-facing product and sales decisions, borrowing and
lending, form a core part of the funding of the enterprise and management of
the balance sheet.
Bank Treasury I
0
10
20
30
40
50
60
70
80
90
Assets Liabilities
Assets
Cash and reserves
Investment assets
Business loans
Consumer loans
Mortgage loans
Tangible assets
Intangible assets
Liabilities
Central bank
Demand deposits
Fixed term deposits
Bonds
Subordinated debt
Equity
Bank funding is divided into
core deposits (demand and
fixed term) and managed
liabilities (interbank, capital
markets, central bank). Equity
typically covers a very small
fraction of funding needs.
Assets tend to be very long-
term (mortgages) while liabilities
(demand deposit) are short term giving
rise to significant liquidity risk

44
The goal of the financing decisions is to minimize the cost of funding to the
bank and to return capital to the equity holders. Decisions that are available
include:
a. New senior and subordinate bond issue
b. Share issue and repurchase
c. Dividend payment
d. Treasury investments
Credit markets
Banks can raise long term debt financing from capital markets by issuing
either a) new senior bonds or b) new subordinate bonds. Both debt
instruments have a five year maturity and a fixed interest rate. The interest
rate is based on the bank’s public credit rating.
Senior bonds rank higher in the bank’s capital structure, but subordinate
bonds can be counted against regulatory requirements on total capital,
because they are included in Tier 2 capital.
Bank Treasury II

45
Equity Markets
Financing
New shares can be issued to raise equity financing. Solvency regulations
decree a certain level of regulatory capital to be sustained at all times. The
issue price is based on market valuation at the beginning of the round, and
the number of shares issued affects the issue price linearly.
Profit distribution
Dividend payments and share repurchase can be used to return earnings to
the shareholders, assuming the company has retained its earnings and
conforms to solvency regulations including the capital conservation buffer.
The repurchase price is based on market valuation at the beginning of the
round, and the size of the repurchase affects the issue price linearly.
Bank Treasury III

46
Treasury investments
The teams can manage the bank’s balance sheet by investing certain fraction
of the bank’s assets into domestic or foreign treasury bonds. These carry
higher risk and return expectations than deposits with the central bank. In
addition, foreign bonds incur FX risk.
Central bank operations
The lender of the last resort in the Cesim Bank simulation is a central bank.
This means that all emerging funding gaps are covered by automatically
taking 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 program
that carries a higher interest rate.
The central bank also required certain amount of minimum reserves to be
deposited with it at all times. In addition excess cash funds are held with the
central bank as excess reserves in the deposit facility.
Bank Treasury IV

47
Projections
Projections can be launched from the bottom of the page and they consist of income
statement, balance sheet, segment based income statement and loan book. In
addition, projections include key parameters for current and previous periods.
Current round figures update continuously as decisions are made. Actualized figures
for the previous round are shown on the right.

48
Net interest margin, % = Net interest income / Interest income
Indicates the bank’s ability to generate value from its core operations, borrowing and
lending. Calculated as interest income less interest cost divided by interest income. All
balance sheet items that generate interest income or costs are taken into account.
Cost / Income ratio = Total non-interest costs / Total income
Indicates 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 assets
Indicates the bank’s financial leverage and solvency risk by taking into consideration
amount and type of capital as well as riskiness of assets on balance sheet as required by
regulatory standards. CET1 includes
Tier 1 ratio, % = CET1 + Other Tier 1 capital / Total risk weighted assets
regulatory standards.
Bank Specific Financial Ratios I

49
Total Capital ratio, % = Tier 1 + Tier 2 Capital (subordinated debt) / Total risk
weighted assets
regulatory standards.
Risk weighted assets = All assets on balance sheet weighted with individual risk
factors
Risk weighted assets calculation standardizes the risk inherent in the different balance
sheet items on the bank’s balance sheet. This is required to better understand the
amount of capital that should be held against bank’s total assets, because the risk
associated with for example central bank reservers, gold, long-term customer loans,
treasury bonds and real estate is very different.
Rate sensitive assets and liabilities
Rate sensitive assets and liabilities refer to balance sheet items that are based on
adjustable interest rates and whose cash flows can change over time.
Bank Specific Financial Ratios II

50
Profit before taxes, % = Profit before taxes / Total income
Indicates the bank’s ability to generate profits from its operations. Profit before taxes is
calculated after customer credit impairments.
Net margin, % = Profit for the period / Total income
Indicates 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’ equity
Indicates the return that the bank earns to its shareholders.
Return on assets (ROA) % = Earning before interest and taxes / Average Total
assets
Indicates the bank’s ability to generate returns with all of its assets.
Equity ratio = Total Shareholder’s equity / Total assets
Indicates the bank’s financial leverage, i.e., what proportion of assets are financed with
common equity.
Key Financial Ratios I

51
Key Financial Ratios II
EPS (Earnings per share) = Profit for the period / Number of shares outstanding
Dividend yield-% = Dividend per share / Share price
Indicates the annual percentage of return that the current level of dividend provides to
the investor, as compared to the current share price
P/E = Market value per share / EPS
P/E indicates how many years it takes with the current level of earnings to pay the price
of one share. High P/E ratio usually implies high growth expectations and vice versa.
P/B = Market capitalization / Shareholders’ equity
Indicates the financial markets’ perception of the true value of the bank’s equity
compared to its book value.
Cumulative total shareholder return, % (winning criteria)
 













 
 1%100
1 periodthis
priceshareperiodinitial
shareperdividendscumulativepricesharecurrent
The concept of total shareholder return is explained on the next slide

52
Cumulative Total Shareholder Return is the average annualized
percentage return that a company delivers to its shareholders during the
whole simulation. It takes into account the changes in the company’s
share price and cumulative dividend payments.
Example:
1. No dividends. Let’s say that the share price in the beginning of the
game is 10EUR, and after one round (=year) the share price is
12EUR. This gives 20% return to shareholders for that given year.
2. With dividends. In addition to the above, the company pays a 1EUR
dividend 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 add
cumulative dividends to the share price and annualize the return. For
example, 30% cumulative return over three years would be 9%
annualized return on average.
Cumulative Total Shareholder
Return % p.a.

53
Decision Checklist
On the decision checklist page all team members’ decisions can be seen side by
side. By pressing ’copy’ a team member’s decisions are moved to the team decision
column. At the deadline, the system reads the decisions from the team decision
column and calculates results for the round.
Team decisions can be accessed and consequently edited directly by pressing ’go’ in
the team column.
Note that previous round decisions will be used if there are no saved decisions for
the round.
Also historical decisions for any team member can be accessed by choosing the
respective round from the dropdown menu.

54
After each round the system generates reports that depict the results of each
team in a particular market.
Results consist of:
a. Summary report with a set of charts
b. Business line reports for Retail, SME and Corporate banking, and
Financial services and products
c. Back office reports for Personnel, Systems and Risk management
d. Financial statements; including an income statement with a
separate statement of comprehensive income and a balance sheet
e. Financial ratios; including share price info and key financial
indicators
f. Banking sector report portraying the development of the industry
Results provide useful information about a team’s own sales, operations, and
finances. In addition, results can be used to benchmark performance with the
competing teams in the same market.
Results I

55
Analyzers
Some results reports include additional information only available in the
Instructor Results view. We call these analyzers, and they typically offer more
insight into the formation of results by for example detailing result item
subcomponents etc.
Results II

56
Cesim
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00100 Helsinki, Finland
Tel. +358 9 406 660
www.cesim.com
contact@cesim.com
Technical Support
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Cesim Bank Banking and Financial Services Management Simulation Game Guide Book

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