Feedback and suggestions for DLC Banking

[LT3001]

Thanks,

On the bug fix, it seems you're right. Have played for hours this afternoon without any problems with new version. Cheers

[buells]

After finally playing the banking DLC beta, I have to agree that the best way this will work is having the bank be a dedicated banking subsidiary. The AI could have certain "banking focused" companies if it is too confusing to have them set up subsidiaries. As it stands, everything is getting quite confusing for me. The debt funding supporting the bank and the PP&E associated with the bank should all be part of the bank's balance sheet, not the holding company's.

Otherwise, besides crashing constantly, which I am sure will be fixed, it seems very cool. I can post screenshots of my error messages.

The one other issue is that you shouldn't be able to buy back bonds immediately before they are due for a 20% discount to par value. That just doesn't make sense. As maturity nears, the bonds should trade closer to par value. Also, refinancing is a problem. When you are trying to refi your bonds or loans, your credit rating is still impacted by the outstanding debt, at least if you are trying to refinance before maturity.

[David]

After finally playing the banking DLC beta, I have to agree that the best way this will work is having the bank be a dedicated banking subsidiary. The AI could have certain "banking focused" companies if it is too confusing to have them set up subsidiaries.

For this to happen, the Banking DLC would have to require the Subsidiary DLC to run.

As it stands, everything is getting quite confusing for me. The debt funding supporting the bank and the PP&E associated with the bank should all be part of the bank's balance sheet, not the holding company's.

Could you please elaborate this a bit more?

Otherwise, besides crashing constantly, which I am sure will be fixed, it seems very cool. I can post screenshots of my error messages.

I've got your email. Please download the latest version which has the bug fix.

The one other issue is that you shouldn't be able to buy back bonds immediately before they are due for a 20% discount to par value. That just doesn't make sense.

So such a scenario never happened in the real business world?

Also, refinancing is a problem. When you are trying to refi your bonds or loans, your credit rating is still impacted by the outstanding debt, at least if you are trying to refinance before maturity.

This also works differently in the real world? Any real world examples that you could provide to illustrate it? And in what way would you suggest for modifying this aspect of the game?

I will then organize your inputs and forward them to the dev team.

[buells]

Okay, first of all, I think I was wrong about the bond value at maturity. With inverse inflation on, the face value declines over time (very nice attention to detail). In theory, a bond should trade at face value immediately before maturity unless it is expected that the company will default. If the company offered to buy the bond back at a huge discount immediately before the maturity, no one would sell unless the company did not have enough cash to pay back the whole issue. In any case, I don't think that is a problem here.

On refi, it seems like once the game gets going, that isn't much of an issue. In the scheme of things, it may not matter that much. I would need to keep playing to figure out whether it matters for game play. Generally speaking, when a company refinances, the amount of debt it can borrow and the terms of the debt are dependent solely on what its capital position looks like at the time of refinancing. Debt that is going away doesn't matter. Only the debt that will be outstanding going forward drives how creditors view the balance sheet (with some nuances, sure).

I understand your point on the subsidiary aspect. There might be ways to avoid that.

My bigger concern is that things seem to have gotten really complex relative to what the player can reasonably manage. Maybe there are heuristics to deal with this once you get the hang of things. I am not sure.

I am specifically talking about with respect to the financial aspects of the game, which are being added here. For example, I need to think about what will give me the best return across many different financing alternatives. At any given moment, my sources of funds are:

- Cash on my books (only cost is opportunity cost)
- Withdraw money from a bank deposit (cost is foregone interest)
- Issue bonds (cost is interest rate)
- Take out a loan from a bank (cost is yield at issuance)
- Sell stock (cost is foregone future gains and dividends)
- Issue shares (cost is dilution)
- If I have a bank, I may be able to transfer funds from the bank to the holding company
- Sell other assets (cost is whatever return I expected to earn on my assets)

My uses of funds are:

- Payback loans (return is interest rate)
- Buy bonds (return is current yield)
- Deposit funds in bank (return is interest rate)
- Buy stock (return is future gains and dividends)
- Buyback my own stock (often not available, but return would be my earnings yield)
- If I have a bank, transfer funds to bank (I am not sure conceptually what the return is... presumably it is the bank's expected ROE but that isn't shown in the game)
- Invest in other assets (return is my ROA on normal operating assets like land, factories, etc.)
- Pay dividends (return is whatever return the player can make on personal assets, which seems to be very low)

Part of the beauty of the base game is you don't need a calculator to make decisions. While a Finance DLC necessarily introduces some mathematical complexity, I find it a bit hard to navigate all of these decisions on the financing side of things. I can't easily figure out if I should take out a bond to pay back a loan, take out deposits to buy back a bond, or do something else. It is especially complicated if I have my own bank. Will withdrawing my deposits from my bank reduce its net interest margin? As an aside, I'm not even sure what happens when I withdraw deposits from my own bank because even though it has no cash, somehow I get paid back without being asked to inject more funds. I think that might be a glitch or something.

The other complex thing is that since different bonds, loans and deposits have different maturities, they have different interest rates and opportunity costs associated with them. I think the real world is actually less complex because we have a concept of spread and many assets and liabilities have floating rates. In the real world, my loan is probably tied to the floating base rate with a spread of maybe 3.5%. I can look at a bond and see that it has a spread to the government bond yield with a similar maturity of, say, 5%. That makes it a bit easier to disentangle the yield curve factors from the credit factors. I think that probably doesn't need to be incorporated, but it is good to bear in mind.

Here are my concrete suggestions:

• Provide some kind of tool for directly comparing interest on bank deposits, bank loans, and bond issuance for a given maturity. Ideally, this could also let you compare cost of new borrowings against the ones you already have for a given maturity date

• That same page could have a column chart or at least a table with the timing of maturities for existing borrowings, but this is less essential

• Prevent the player's company from depositing or borrowing funds from their own bank. If this is unappetizing, perhaps just make sure the player company's deposits and withdrawals directly affect the bank's cash position

• Let banks issue bonds and borrow money directly (I have a bank with 50% equity capital and a loans to assets ratio stuck at over 100% despite a target of 93%, which doesn't really make sense)

• Provide some indication of what the average expected return is on the global stock market investments. I guess I could try and figure this out myself, but it is a challenge

• One other possibility is to have the interest rate on outstanding loans fluctuate in real time with the global interest rate. Then I don't need to worry about the effect of the maturity date on the interest rate. Maybe it already does so?

• Consider having company cash just automatically get split among banks and earn a floating interest rate. The player could adjust the split between different banks similar to how the split for loan credit quality is being done. That would reduce the micromanagement considerably because you don't need to go to a screen to think about making and withdrawing deposits. I don't think the current deposit mechanism adds a lot of value even though it is a cool idea

This reminds me of when I was in banking, the capital markets desk would always get angry when we should show cost of capital graphs to clients for convertible bonds and the like showing securities with different maturities plotted on the same graph. X-axis would be stock price growth of the issuer up until maturity and y-axis would be cost of capital (driven variously by stock dilution and cash coupon). Their gripe was that the costs of different maturities are not comparable because of different yield curve exposure.

By the way, you guys should have a Patreon or something. I would be happy to contribute a bit given what an interesting game you've built. I also feel bad critiquing what is truly an amazing product given my own technical ability to add value to it via modding and the like is nil!

[David]

9. Love the bond market & new lending from banks functions. Few things to add/refine here. Firstly, when your company goes to borrow debt tab in financial actions, there should be a full list of borrowings and maturities down the bottom, not just for the coming year. That allows a player to plan in advance how much liquidity they need and when. The bond section already has this in place,

I tested it and the borrowing screen does show the full list of borrowings from the selected bank. Could you please test it again and see if you still only see the loans for the coming year?

but it does not adjust the principal amounts when a player buys back bonds in the bond market. The amount of outstanding principle here should be reduced alongside bond buy-backs.

This has been fixed in the latest version already. If you still encounter it, please let me know.

15. For the overall economic graphs, there are no debt metrics shown - total deposits & loans, and relative to GDP etc. It would be good to be able to see the level of credit across each city & nation etc. This would suggest which markets had more growth potential, and also where the risks lie. When debt to GDP gets high there should be a much greater probability of an economic downturn, and debt and deposits to GDP should fall during a downturn. This should also affect the level of overall demand in the economy, and shrink the economy, much like it does in the real world. Meanwhile, a credit boom will boost demand. It seems like you have already incorporated some of this into your engines, but having the debt graphs would be a nice addition.

Did you mean 1) adding one graph showing the total deposits+loans relative to the GDP, or 2) adding two graphs, one showing total deposits relative to GDP, and another showing total loans relative to GDP?

How about bonds? Should bonds be included in the total debts of this graph?