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TOPSIM Universal Banking

Participants Manual Part I Introduction
Version 1.4

TATA Interactive Systems GmbH. All rights reserved.

TOPSIM - Universal Banking

Table of Contents
1 1.1 1.2 1.3 1.4 2 2.1 2.2 3 3.1 3.2 3.3 4 4.1 4.2 4.3 5 5.1 5.2 5.3 5.4 6 6.1 6.2 6.3 7 7.1 7.2 7.3 7.4 7.5 8 8.1 8.2 Forword Learning Objectives Using the handbook Course of the Seminar Stock Price Your Tasks Farewell Letter from the previous CEO Overview of Decisions Business Banking Unit Decision: Lending Business Interest from Investment Other Decisions in Business Banking Investment Banking Unit Decisions: Securities (Nostro or Own) Hedging Bond Issue Business Financial Management Shareholder Policy Equity Capital Policy Long term outside financing Interbank Business Wealth Management Unit Asset Management Business Custody Business Sample Calculation: Wealth Management Human Resources & Logistic Human Resources Employee Capacities & Workload Logistic Business (PT / IT) Logistic Units Indexes in the Human Resource and Logistic Business Marketing Business Decision: Marketing Sample Advertising Calculation 1 1 1 2 2 5 5 6 7 8 10 10 11 11 13 13 16 16 17 18 19 21 21 23 25 26 26 28 29 30 31 33 33 34

TOPSIM - Universal Banking

Foreword
First of all, we want to welcome you to TOPSIM Universal Banking. Business simulations build a bridge between Business theory and experience. The following simulation creates a realistic model of a Bank and offers participants a: Fast Risk-free Long lasting collection of business experience

It is understood that a simulation can not completely simulate all of a companys complexities. Because of professional reasoning it is necessary to make the simulation easier (Complexity reduction), to avoid participants losing all oversight of the Simulation and therefore not getting any use from the game. TOPSIM Universal Banking is an interactive and learning through action game, that follows the motto:

1.1

Learning Objectives
Recognizing individual factors that effect the success value of a bank Identifying and integration of various refinancing options Leading different divisions within a bank in a near-realistic competitive environment Understanding the relations of different business aspects in a financial institution Making goals and strategies in a competitive environment Understanding business reports and making decisions within a team Managing difficult and complex decisions even in periods of uncertainty Deepening the business thought-process

1.2

Using the handbook

This handbook will help you in the preparation of the simulation. In the introduction phase of the seminar, it is recommended that you study the handbook intensively to gain an overall understanding of the simulation. During the simulation, this handbook will be helpful in looking up information when stuck, and provides support when making decisions. The complexity of the decisions will increase throughout the simulation. Therefore, hints and additional notes are provided throughout the simulation, which may not be relevant until later periods.

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1.3

Course of the Seminar

In TOPSIM Universal Banking, you will find yourself (along with your teammate) in the role of General Manager of the SavingsBank Corp. In the beginning, you will receive forms which will help you gain a general overview of the current status of your bank.

Besides the decisions that are made, many other transactions and activities in the just finished period are simulated on the computer. The results of the each period can not be calculated until every team has submitted their decisions for the period. To maintain a fair competition, it is important to submit all decisions to the instructor in a timely fashion.

Every team will receive their results (reports), which should be used as the main framework for making decisions in the following periods. In the beginning of every period, you will also receive business news, which will provide information about the entire economic situation. This information provide further clues to making successful decisions, for example, for your condition and personnel politics. In contrast to a real-life bank, the simulation provides the advantage of receiving the results about decisions within a short time-frame.

The following course of actions will be visualized with this basic information:

Introduction Decisions

Submission of decisions

Evaluation

Simulation

Pictured: Course of a seminar

1.4

Stock Price
For ever bank in the simulation, a separate share price will be determined. This will provide the quality measurement for the banks performance. In determining the price per share, the following factors will affect the share price, each with a different weight:

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Balance Sheet Total Return on Equity Net losses (in %) of equity capital Bridging credit as % of balance sheet total Depot Performance-Index (Wealth Management) Planning quality factor Service level index Sum of advertising expenses as % of balance sheet total Direct earnings per shares (after tax) Shortage of regulatory necessary equity capital Shortage liquidity statement II: Overall liquidity Employee satisfaction Share price previous period Market share loan and deposit business

- -/++ +++ ---- -/++ ++ ++ + + ----++ +++ ++

Share Price

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Introduction

SavingsBank
The Bank of your Choice

Welcome to SavingsBank Corp.!

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2 2.1

Your Tasks Farewell Letter from the previous CEO

SavingsBank
The Bank of your Choice

Dear Successor,
My management team and I want to welcome you and wish you a great first day at the SavingsBank Corp. As you already know, the previous management team has decided to step down, to make room for young and fresh talent. In the past, we have successfully worked in the national and international bank market. Last year alone, we achieved a profit after tax of 105 million Euros. The future for banks with great service looks very bright; this caused a study over the predicted market, as follows: The competitive situation of many companies has been marked by cost-pressure and market cultivation. These developments are clearly apparent in the drastic decrease of margin in the interest business and can lead to further concentration in the market To create a successful handover, we will leave all information regarding the company and results of the previous business year. We wish you much success in the future! Kind Regards,

Robert F. Chairman

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2.2

Overview of Decisions
The complexity of the standard-scenario in Universal Banking increases in every period throughout the simulation. The following summary gives you an overview of the individual modules available:

Standard Scenario Module 1 Business Banking Lending- / Deposit-Business Additional Operating Costs Investment Banking Securities Trading Business (Nostro) Bond Issue Business Wealth Management Fixed Asset Management (Customer type balanced) Marketing Marketing Decisions Human Resources / Logistic Automatically generated hires or dismissals Easy HR Financial Management Shareholder Policy Equity Capital Policy Long-term debt financing Interbank business Pre-calculation Allow Pre-calculation X X X X X X X X X X X X X 2

Availability per Period 3 4 5 6

X X

X X

X X

X X

X X

X X

X X

X X

X X X X X X

X X X X

X X X X

The individual modules can be turned on and off as desired by your instructor. The same holds true for the modules that may not appear in the standard-scenario. In this situation, it can happen that the values in the initial scenario (period 0) deviate slightly from the standard-scenario initial situation.
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Business Banking Unit

Households and companies can put away money, which is not needed in the short-term, in various interest-bearing investment options. On the one hand, large investments can often times not be completely financed on your own. Therefore it is necessary to make credit extensions and take on investments to secure other. A common aspect about a bank is its so-called transformation function; this is the banks ability to cover a large credit by bundling many smaller deposits (lot size transformation). Additionally, the bank can take on the various credits and deposits of maturing deposits and credits (term transformation). The last dimension of transformation is the credit risk transformation. Only the existence of banks and their equity makes it possible for companies to get large loans. The credit business (receivables from customers) identifies the sum of the assets, specifically loans, that the bank has given to customers. This is the asset side of the banks balance sheet. The deposit business (liabilities due to customers) of a bank is the refunding side, which is responsible for taking on customers money in the form of investments. The deposited money is accounted for in the liabilities side of the balance sheet. The portion of borrowings in banks is generally, in comparison to other companies, much higher. The SavingsBank Corp. offers the following Products and Services in the area of Business Banking: LENDING BUSINESS Receivables from customers Loans secured by mortgage Otherwise secured loans Unsecured Mortgage claims With variable interest rate With fixed interest rate In the area of Business Banking, you must determine the interest rate conditions for the credit extensions (Credit market) and the taking on of customer money (deposit market). Additionally, to keep tabs on what the competition is doing, you can purchase a Market and Competition Report. The area of planning values is used to ensure that you are reaching your goals, and has an influence on the share price of your bank. DEPOSITS BUSINESS Liabilities due to customers Savings account Personal account Current account Fixed term-deposit Medium-term notes

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3.1

Decision: Lending Business

In the credit market many different decisions have to be made: Participant Decision 1: You will have to make decisions regarding Mark-ups and Mark-downs in the following areas. The decision has to be made in the three main categories (loans secured by mortgage, loans secured by other collateral and unsecured loans). Additionally, you have to take these decisions for the individual ratings. You can control the composition of your portfolio by deciding on the interest rates. Generally, attractive interest rates (low rates) will lead to a higher market share. Accordingly, a high interest rate will lead to a low amount of new business. Yet, your market share does not just depend on the interest rates but also on your competitors interest rates. Therefore, it can happen that you offer a low interest rate in a certain credit category but still have a low market share. This could be the case if your competitors offer lower interest rates than you. For the Mark-up and Mark-down decisions, a minimum (-1.5%) and a maximum (+1.5%) are set in place for all customer ratings. Information regarding the expected interest rates in the upcoming period can be found in the scenario text. Information regarding your competitors decisions (in the previous period) can be found in the Market and Competition Report, which can be purchased from the external market research institute for 3 million Euros (see Section 3.3.1). Participant Decision 2: Your second decision has to be made regarding the Additional Operating Costs. This decision is made once and applied to all credit categories. Operating costs are expenses incurred through staffing and infrastructure maintenance. These costs include all costs, from the credit check area all the way to offering financial advice to customers. In period 0, the additional operating cost was 0.6%

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3.1.1

Explanation: Calculation of Credit Interest Rates

The interest rate for credits is derived from a mixture of the basic interest rate (refinancing interest rate), the rate of acceptable risk, and the cost of capital. In the participant system, you will find the basic rate of interest, which already includes the refinancing interest rate, rate of risk and cost of capital. This basic rate changes from period to period according to the economic development and the overall interest rates. Refinancing Interest rate: the refinancing cost comes from the costs of getting the money for credits, international money and capital markets are included. The amount of these costs depends on the market interest rate over time. Cost of Risk: risks are in the nature of the credit business. Credits can be threatened or default all together. The risk in credit includes the default risk. The credit risk therefore is the loss in value of the money following a default on a loan, as well as the diminution of bonds. The cost of risk can vary between 0.001% to 4.00% for the individual ratings. Cost of Capital: After taking into consideration the loss from the cost of risk, all expected risks having been accounted for. Now the only risk still existing is the fact that it is not possible to determine how much loss is going to happen in each area. This risk is not covered by a risk premium but instead by your own capital. Therefore banks are forced, by law, to cover risks with their own capital. The return on the equity capital will also be taken into consideration. Additional Operating Costs (Participant decision): see explanation above. Mark-up / Mark-down (Participant decision): see explanation above.

3.1.2

Explanation: Customer Rating

The customer rating mirrors the creditworthiness of a customer, and therefore shows the ability to repay on the financial obligations. In TOPSIM Universal Banking, all credit customers fall into one of five rating categories; the following chart illustrates the rating classes from Standard & Poor and how they translate to TOPSIM Universal Banking ratings:

Rating: TOPSIM Universal Banking +++ ++ + --

Rating: Standard & Poor's AAA AA A BBB B

Description

Best Rating. The company is highly capable of paying interest and making repayments. The company is capable of paying interest and making repayments. The company has a good creditworthiness, which, however could be negatively influenced by external political or economic factors. The chances for timely repayment are good. Changes in the economic conditions could, however, impact the ability to repay. The chances that the customer can repay the loan long-term are somewhat small.

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3.2

Interest from Investment

Participant Decision: You must decide on the interest rates (in %) of your deposit business. On the contrary to the decisions that have to be made in the credit market, here decisions regarding the absolute values have to be entered into the decision form. The interest rate decision has to fall in between + / - 1.5 % of the interest rates given in the respective economic news. The interest rates for the deposit market can be taken directly from the economic news. Regarding the determined interest rates, you can influence the market share of the new volume of individual loan products. Generally, higher interest rates should lead to a higher market shares because customers prefer to get a higher interest rate for their investments. The development of your market share also depends on the interest rates of your competitors.

3.3 3.3.1

Other Decisions in Business Banking Market and Competition Report

Participant Decision: You must decide if you want to purchase a Market and Competition Report (yes/no). To receive information regarding your competition, you may purchase a market research report (3 million Euros) from an external market research firm. The cost of this report will affect your profit and loss account. The research report includes information regarding the balance sheet, profit and loss statement, interest rates and markets shares of competitors.

3.3.2

Planning Values
Participant Decision: Deciding on planning values for the balance sheet sum, net profit, lending and deposit business (all in millions of Euros). In the participant system, planning tools are at your disposal. These give you the chance, with the general knowledge of the development of the market (scenario texts) and assessment of competitors (Market and Research Report) And your own decisions, to lead a planning analysis. Each runthrough of the planning values cost 0.1 million Euro (in period 1). The final values are automatically used by the decision system, so that the values which have been entered into the planning tool do not have to be entered again. In each periods Planned / Actual analysis, a quality of planning will be assessed by a simple calculation. The quality of planning will affect your banks share price. A good planning is of special importance when it comes to resource planning (advertising, logistic, human resources, etc).

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Investment Banking Unit

In the standard scenario of TOPSIM Universal Banking you are only responsible for the area of the security trading business (Chapter 4.1 and 4.2). The area of bond issue business (Chapter 4.3) is not part of the standard-scenario and therefore only relevant if the instructor decides to activate that module. Note about the exchange rate in TOPSIM Universal Banking: The given exchange rate follows a standard system. It is given how many units of domestic money (Euro) is given for one unit of foreign currency (USD). This is called price quotation. Example: Period 1 Purchase of shares (in USD) Price per share Exchange rate USD / EUR Number of shares (10,000 / 0.85 EUR) Period 2 Share price is unchanged Exchange rate USD / EUR Value of shares (11,765 x 0.75 EUR) Exchange loss (not yet realised) 0.75 EUR 8,824 EUR 1,176 EUR 1.00 USD 0.85 EUR 11,765 Shares 10,000 EUR

4.1

Decisions: Securities (Nostro or Own)

In the security business, you decide on the investment decisions for the nostro inventory. By investing in securities, the profitability of your bank can increase drastically. However, this type of business also involves high risk. Therefore, you must back the securities with enough equity capital. You have the following investment options:
INVESTMENT CURRENCY

Domestic money market Foreign money market Domestic shares Foreign shares Domestic bonds Foreign bonds

EUR USD EUR USD EUR USD

Participant Decision 1: Make decisions in each asset category concerning the purchase / sale (in million Euro). Information regarding individual asset categories can be found in the next chapter. Participant Decision 2: Make a decision, if your price risk (in the stock and bond market) and exchange rate risk (for investments in USD), should be hedged or not. You make the decision to protect securities from price losses (line HEDGING Price) and/or foreign currency risk (line HEDGING USD) by selecting either No/ Yes (double click in the specific box or entering Y/N).

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More information regarding hedging can be found in section 4.2. Additional notes regarding the exchange rate and the foreign currency can be found in the scenario text.

4.1.1

Money Market
Money market investments are short term investments with a maximum maturity date of 12 months. The money market investments from the previous period will be repaid at the beginning of the following period. For this reason, only the purchase of such investments can be made. There are domestic as well as foreign money markets available for purchase.

4.1.2

Stocks
The owner of a share of stock is automatically a partial owner of the company. The share entails ownership and participation rights. Investments in Stocks are usually riskier than money markets and bond investments. Domestic as well as foreign shares are available for purchase. Note: The purchase and sale of stock always takes place at the closing price of the previous period.

4.1.3

Bonds
Bonds are fixed securities, which are commonly used for long-term investments by large companies. Bonds usually carry lower risk than stocks. But the owner of a bond is susceptible to changes in the interest rate. Both domestic and foreign bonds are available for purchase. The purchase of bonds is always done at par (100% of the bond). Because the bonds interest rates are fixed, their value is influenced by changes in interest rates. Note: Purchases are made at the closing value of the previous period and they follow FIFO.

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4.2

Hedging
Hedging transactions are financial transactions executed to protect against unfavourable exchange rate developments or price risks. In TOPSIM Universal Banking, you can insure against the above-mentioned risks by purchasing PUT options. A PUT option is the right to sell securities or foreign currencies at a later date for a price that was determined in advance. The hedging takes place at the beginning of the periods. Hedging transactions protect the investments during the valuation for the final balance sheet against any foreign currency and exchange rate losses. To protect against financial risks again in the following year, the specific boxes must be marked once again, otherwise no protection against unfavourable exchange rate developments or price risks exists in this year. To protect individual fixed assets, the following cost should be included in the calculation:
INVESTMENT COST OF PROTECTION

Stock Bonds Foreign Currency

3% 2% 2%

4.3

Bond Issue Business

In case the instructor has given access to the investment banking module, then in each period the up to three bonds can be placed at the markets for customers. In this business it is possible to raise additional profits, but also gives additional risks in incurring losses. In the Economic News, the following information will be provided regarding investments: Issuer Rating Maturity Investment amount Minimum underwriting price Interest rate for a underwriting quota of 100%

The rating provides information regarding the quality of the issuer. The worse the rating, the higher the likelihood that the outstanding bond will not be fully covered by customers.

4.3.1

Decision: Bond Issue Business

Participant Decision 1: You decide on the interest rate (in %) of the bond emission. It is necessary to orient oneself at the requirements of the capital market as well as the rating of each issuer.

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Participant Decision 2: You need to determine the price for which you would carry over the whole amount. The emission amount is 100%. The given minimum price can not be undercut. If you do not want to participate in the bidding process, then the underwriting price should be left at 0%. The difference between the emission value (100%) and the lower underwriting price should at least cover the costs that the bank is incurring.

4.3.2

Handling of the Bond Issue Business

Award: The bank making the customer the most favourable offer (based on the offered interest rate and the underwriting price) is awarded the issue. If several banks have made the same offer, the bond is divided among them. The bond issues taken on, will immediately be placed by your customers. The price is always 100%. Whether the bond will be fully subscribed or not depends on: The fixed interest rate of the bond compared to the market interest rate (for bonds ; see scenario texts). the issuers rating.

If the total issue cannot be placed completely (subscription rate less than 100%), the unsold amount will be sold immediately at a reduced rate (difference between the issue price and lower stock exchange price).

4.3.3

Costs of the Bond Issue Business

Taking over a bond causes fixed and variable costs. The fixed costs will be 10 million Euros and will be charged as soon as the bank offers an underwriting price. The variable costs are always 1% of the allocated issue amount.

4.3.4

Example: Bond Issue Business

The bank with the lowest emission costs is awarded the issue. If two banks offer the exact same conditions and both receive part of the award, then the volume will be divided between the two institutions. EXAMPLE Maturity Issue Amount (mEUR) Interest at subscription quota 100% Interest (%) Underwriting price (%) Payment to issuer (m EUR) Loss (mEUR) Total Interest payments (mEUR) Costs Issuer (mEUR) BANK 1 8 2,000.00 8 7.20 95.00 1,900.00 -100.00 -1,152.00 -1,252.00 BANK 2 8 2,000.00 8 7.90 99.00 1.980.00 -20.00 -1.264.00 -1,284.00

In this example, both banks expected to receive the entire award, but because both banks selected an interest rate lower than the current market interest rate, both parties incurred an overall loss.

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Per % difference of interest The subscription quota decreases by ...% Interest difference (%) Subscription quota (%)

0.25 4.00 0.80 87.20

0.25 4.00 0.10 98.40

Bank 1 has won the award, but it is not able to place the entire bond on the markets, which causes it to accept a deal. The loss is the higher the lower the subscription quota. Bank 2 has also participated in trying to get the emission and therefore must also carry the fixed costs. If bank 2 had gotten the award, then it would have had -10.26 million Euro loss, even though it can almost place the entire volume. Bond earnings (m EUR) Deal (m EUR) Variable Costs (mEUR) Fixed Costs (m EUR) Profit/Loss of the Bond Issue Business 100.00 -16.38 -20.00 -10.00 53.62 20.00 -0.26 -20.00 -10.00 -10.26

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Financial Management
The Financial Management business deals with the banks shareholder policies, equity capital policies and liquidity planning.

5.1

Shareholder Policy
Participant Decisions: You must decide, if and how much of the previous years profit (or a portion of other reserves) you would like to return to shareholders. The bank may disburse its profits in the form of a dividend. The shareholder policies impact the share price on the one hand, but also the banks equity Publicly traded companies usually avail themselves of a dividend to disburse profits from the prior year (or a part thereof) to the shareholders. Even if the bank incurred losses during the prior year, it may still disburse dividends and take it from the Other Reserves. The dividend policy has an effect on the stock price of individual banks, the liquidity, and the equity capital and therefore also the Return on Equity (RoE). Keeping profits in the bank increases the equity capital.

Example of a dividend disbursement: DIVIDEND DISBURSEMENT Equity Capital (mEUR) Nominal Share Value (EUR) Number of Shares Net Earnings (Prev. Yr. / mEUR) Share Price (Beginning of Period / EUR) Dividends per Share (Decision EUR) 800 20.00 40,000,000 150 100 1.20

KEY FIGURES Dividends (% from nominal share value) Dividends (% / after-tax)

1)

6.0 0.9

1)

Dividends less tax in percent of the share price

DISTRIBUTION OF PROFITS Legal Reserves (mEUR)

2)

7.5 48.0 94.5

Shareholders (Dividends / m EUR) Other Reserves (Mio. EUR)

2)

5% until the legal limit 10% from the capital equity

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5.2

Equity Capital Policy

Equity capital is the basic building block of business operation in every company. The bank is responsible for protecting itself from risk by always having enough equity capital to back defaults which may occur. The underlying legal rules are outlined in the Basel II regulations. This Basel equity capital agreement was signed at the Bank for International Settlement (BIS). The main goal of this agreement is to improve the stability of the international financial system. The overall banking system is trying to reach capital levels that could decisively reduce the risk of bank insolvencies. More specific information regarding the regulation of equity capital can be found in part 2 of the participation manual.

5.2.1

Increase in Capital / Repayment of Capital

Participant Decision: You must decide how much you would like to increase (+) or repay (-) equity capital (in mEUR)

5.2.2

Increase in Capital (+)

Every bank has the chance to increase capital, as long as the module has been turned on by the instructor. An increase in capital is absolutely necessary if the equity capital is not enough to cover the risks of the bank. Please note, that an increase in the equity capital causes the return on equity to decrease.

ISSUE INFORMATION INCREASE IN CAPITAL Issue price of new shares (% of share price previous reporting period) Maximum increase in capital (% of equity capital of previous reporting period) Nominal share value (EUR) 60 % 50 % 20.00

CALCULATION EXAMPLE FOR AN INCREASE IN CAPITAL Increase in capital (Decision / mEUR) through issuing 12,500,000 shares with a nominal value of 20 EUR each Share price (Previous period in EUR) Issue price per share (60 % of EUR 80) Offering premium per share (EUR 48 EUR 20) ADDITIONAL CAPITAL THROUGH INCREASE IN CAPITAL Increase in equity capital (Mio. EUR) (12,500,000 shares x EUR 20 nominal) + =
1)

250 80.00 48.00 28.00 250 350 600

Offering premium (Mio. EUR) (12,500,000 shares x EUR 28)

1)

TOTAL CAPITAL INCREASE (Mio. EUR)

The offering discount must be transferred to the legal reserves.

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5.2.3

Repayment of Capital
A repayment of capital makes sense, when overcapitalization should be stopped. The bank is overcapitalized, if the ratio of capital to potential risk is too high. Overcapitalization negatively influences the banks profitability and the profit rate per share, which can have a negative impact on the share price. If the bank generates the same profits with less capital, the capital profitability increases. CALCULATION EXAMPLE FOR REPAYMENT OF CAPITAL Repayment of capital (Decision / mEUR) with the withdrawal of 5,000,000 shares with a nominal value of 20 EUR each Share price (previous period / EUR) Nominal share value (EUR) CAPITAL REDUCTION THROUGH CAPITAL REPAYMENT Reduction of equity capital (mEUR) (5.000.000 shares x EUR 20 nominal) + = Reduction of reserves (mEUR (5.000.000 shares x EUR 60) TOTAL CAPITAL REDUCTION (mEUR) / shares at par value) - 100 - 300 - 400 - 100 80.00 20.00

Please note: that enough liquidity has to remain when decreasing the equity capital.

5.3

Long term outside financing

Long term outside financing describes the acquisition of capital to cover medium and long term financing needs by issuing long term bonds on the capital market.

5.3.1

Decision: Issuing of Own Bonds

Participant decision: Decide if and in what amount (mEUR) you would like to issue bonds.

The bank can issue bonds with a maturity of 10 periods and a fixed interest rate to obtain long term outside financing. A bond is a security that allows a middle or long term increase in capital. A bond is a security used to obtain medium or long refunds on the capital market. The bond purchaser receives annual interest payments. The borrowed amount is repaid at the end of the term. The interest rate is determined by the current demand in the capital market; it can be called in early based on the economic situation in each period. In addition, the following must be noted: The decision of the current period is additive to the previous periods. Per period, a certain volume of bonds issued in the past will mature. (For repayment amounts, please refer to the balance sheet appendices) INFORMATION REGARDING BONDS Maximum issue volume (mEUR) Maturity (periods) 1,000 10

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5.3.2

Decision: Subordinate Bond Issues

Participant Decision: You must determine the share of the issued bonds which should be issues as subordinated bonds. The decision is made in mEUR and the maximum amount is the total amount of long term bonds issued in the current period.

In the event of a liquidation or bankruptcy of the issuer, the claims of holders of subordinate bond issues are subordinate to the claims of non-subordinate holders. The banks can include subordinate bonds in their supplementary capital (up 50% of the total capital) according to Basel II- regulations. Subordinate bonds can therefore be used to fulfil the regulatory capital requirements. INFORMATION REGARDING SUBORDINATE BONDS Interest margin in comparison to the bond issue Maximum issue volume (mEUR) Maturity (years) Maximum total subordinated bonds of required capital (max. % core capital) + 0,50 % 1,000 10 50 %

5.4

Interbank Business
The term interbank business is used to describe banking transactions between commercial banks. Interbank transactions constitute a large part of the money and capital market. Commercial banks involved in interbank transactions assume a very small counterparty risk. Both parties must be profitable and have a very good liquidity, in order to perform interbank business. The interbank business is an important reference point in regards to the customer business. Banks will not incur customer businesses at conditions which are worse for the bank than the conditions in the interbank business.

5.4.1

Decision: Due from Banks

Participant Decision: Decide if and how many millions of Euros should be invested in the interbank business (due on demand and / or at term). Interest rates for investments at terms are slightly better. The respective amounts are deducted from the liquid assets and thus lead to interest profits. The interest rates are dictated by the market. The investments in the interbank business should be made in order to avoid non-interest bearing cash holdings. Decisions relating to these items are in absolute terms and not additive to the prior period. This means that the volumes entered for the receivables from banks will be listed in the balance sheet at these amounts. You can invest a maximum of 10,000 mEUR in each of the options. When making investments, it is important to also keep the refinancing aspect in mind. If not enough refinancing funds are available, then costly overdraft fees will be applied through the use of a bridging credit.

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The old management has the following assets in the interbank business (period 0): Due from banks on demand Due from banks at term 600 mEUR 6,500 mEUR

5.4.2

Decision: Due to other Banks

Participant Decision: In this decision field, different to the due from other banks, you need to make a decision regarding the interest rate (in %). The interest will affect other banks willingness to invest their money at your bank. The reaction is very sensitive, you must therefore decide very carefully on a reasonable interest rate for due on demand and due at term.. You will find information regarding the expected interest rates and the expected growth of the market in the economics section of the scenario. Interest rate decisions can be adjusted a maximum of the following values from the provided rates in the Economic News: GREATEST INTEREST RATE DEVIATION FOR INTEREST RECEIVABLES FROM BANKS Liabilities towards banks, maturing daily Liabilities towards banks with a fixed term 0,50 % 0,50 %

The interest rates directly impact the market behaviour of the other banks. Therefore the rate of interest is the determining factor of the amount of interbank business you will receive. Banks like to get high interest rates; therefore you will generally get more business with a high interest rate. But, the amount of interbank investment also depends on the interest rates of your competitors, as they may steal business from you by having better interest rate conditions than your bank.

5.4.3

Decision: Cash Management

Participant Decision: You must decide if you would like to let an external service company make decisions regarding cash management. A cash manager looks for short term investment opportunities for liquid assets. For this service, the service company gets a fixed payment of 15 mEUR per period (in period 1). The advantage of using a cash manager is that it invests your liquid assets (in the balance sheet) in short term investments with low interest rates and avoids non-interest bearing cash holdings. The service is that the cash manager finds these investments for you. In period 1, the cash manager has the advantage that it can find investments that would give you a return of 1.9% on your liquid assets.

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Wealth Management Unit

Wealth Management provided by the banks offers comprehensive services and products for customer-specific investment solutions. Customers have the option to have their portfolio managed by one of the banks investment specialists, by granting an investment management mandate, authorizing such specialists to make investment decisions. Customers hope for higher returns than are available in the deposit business, and are willing to take on a higher risk for the higher returns. The current wealth management business of your bank has a value of 12,800 MEUR. Furthermore, your bank offers customers with the custody business the opportunity to invest in securities themselves. For this reason, the bank receives custody charges and brokerage fees from the customer.

6.1 6.1.1

Asset Management Business Decision: Asset Allocation

Private banking (Asset management) involves determining the investment strategy for a particular customer type (so called, high net worth individuals) or, if an additional module is turned on, two customer types (with conservative or dynamic investment profile), whose assets are managed by the bank based on an asset management mandate. In the standard-scenario of TOPSIM Universal Banking, only the balanced customer type is available. The following investment options are available for the investment specialists within your bank:

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INVESTMENTS Domestic money market Foreign money market Domestic shares Foreign shares Domestic bonds Foreign bonds

CURRENCY EUR USD EUR USD EUR USD

Participant Decisions: You will allocate percentages of the customer assets managed by the bank to individual asset types. You have to comply with the mandatory minimum and maximum volumes established by your banks management. In total, 100% of all the money must be invested. Investments are bought and sold at the beginning of each reporting period for the prices from the end of the previous period. Hints regarding the further development of the market can be found in the economics news. Private banking (Asset Management) refers to the diversification of monetary investments, the allocation of the invested assets to various investment types (bonds, shares, money market papers, currencies etc). The total yield and total risk of a portfolio can be managed by changing the asset allocation. This can be done by redistributing the assets among the portfolio's individual asset categories.

6.1.2

Decision: Hedging
Participant Decision: You must decide if you would like to insure your customers money against exchange loss (in all investment areas) and/or market price risks (in stock and bonds business). If you would like to hedge the investment you have made for your customers, then place a check mark in the appropriate box in the decision screen. The costs of hedging are taken from wealth management deposits and have a negative impact on the performance of these deposits. The costs for hedging are the same as in the investment banking business (see sect. 4.2).

6.1.3

Decision: Wealth Management Fees

Participant decision: You must decide on the wealth management flat fee (in % of managed assets). This fee will be charged to customers for your service. Through the wealth management fee, you are able to cover your costs in the wealth management sector and give your bank additional income. Customer behaviour in the Wealth Management Business is also determined by how your rate compares to that of competitors. The higher your fee in comparison to competitors, the more customers you will lose. Customers once lost are difficult to win back. The fee can be a maximum of 5%. At the beginning, your fee is at 2%. This is an all inclusive fee. Your customers do not get charged any additional costs such as for regrouping. The income from the Wealth Management Business can be found in the commission income form the securities and investment business in the profit and loss accounts.

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6.1.4

Decision: Consulting Fee

Participant decision: You must decide how much time your employees should spend for advising customers in the wealth management area (in %). If consulting is intensified, customers with a high savings or portfolio volume could be persuaded to let the bank manage their funds by issuing a management mandate. Spending time in consultancy directly leads to less available time in other activities. By properly advising customers, they may be persuaded to give a management mandate instead of investing their money in the different types of deposit accounts. The decision in the Human Resource module (number of employees in the wealth management sector: acquisition and support; see chapter 7.1.3) are directed towards obtaining new customers towards existing customers who have had their money in the wealth management sector before. Employees in the wealth management business can spend a maximum of 20% of their time for consulting customers, From prior market research, you know that most competing banks invest about 5% of their employees for consulting.

6.1.5

Performance index in the private banking business (PI)

The volume of the asset management business is strongly influenced by your banks overall return. The Performance Index (PI) is calculated as following: CALCULATION OF THE PERFORMANCE INDEX (PI) Interest money market investments and bonds + = Dividend Shares Price losses / -gains of stocks and bonds Currency losses / -gains (EUR) Hedging costs Fee (flat fee of transactions) Customers total net result (income)
Customers total net result x 100 (Volume at the beginning of the period + Volume at the end of the period) / 2

PI =

A high performance index in comparison to your competition leads to a high market share in the wealth management business.

6.2

Custody Business
In the custody business, the bank gives customers the opportunity to access stock markets on their own responsibility. The decision regarding which securities get bought and sold remains with the customers. In the introduction period of the custody business, customers deposits amount to 50.000 mEUR.

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6.2.1

Decision: Custody Charges

Participant decision: You must decide what percent (of the custody business volume) you would like to charge to your customers. Your bank charges custody feeds to your customers for giving them access to the stock markets. Custody charges can be a maximum of 0.5% (of the custody business volume). At takeover, the banks charges 0.2%. The feed will also have a positive impact on your profits. Please note, that with attractive depot rates in comparison to your competitors, more customers could be attracted to your bank.

6.2.2

Decision: Brokerage Fees

Participant Decision: You must decide on the brokerage fees (in % of the stock market turnover). The brokerage fee is applied to the sale or purchase in the stock market with securities for your customers. The commission can have a maximum value of 2%. In the past, the turnover has made up for 40% of the entire volume in the custody business. Also the percentage of brokerage fees has an influence on the market share in the custody business.

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6.3

Sample Calculation: Wealth Management

Sample Calculation: Profits and Expenses (Assumption: Volumes stay constant and when determining the commission fees, no changes will take place. No change in personnel will occur either.) Wealth Management: Volume: Fees (Participant Decision) Income from Wealth Management (12,800 mEUR * 2 %)

12,800 m EUR 2% 256 mEUR

Custody Business: Volume Stock market turnover volume Depot Fees (Participant Decision) Brokerage fee (Participant Decision) Income from the Depot Business (50,000 * 0.2 % + 50,000 * 40 % * 0.8 %) Commission income from securities and investment business

50,000 mEUR 40 % 0.2 % 0.8 % 260 mEUR

516 mEUR

Commission Expenses: Commission Expenses Wealth Management (Volume of Wealth Management & Depot Business) Total Commission Expenses (0.4 % * 62,800 m EUR)

0.4 %

251 mEUR

Return from securities and investment business (profit and loss statement)

265 mEUR

Personnel Expenses: Personnel Wealth Man. (Assumption): Salary per Employee (Example) Additional Personnel Costs Total Personnel Expenses (1,600 * 92,000 EUR * 1.1)

1,600 Employees 92,000 EUR 10 % 162 mEUR

Result from securities and investment business (Total)

103 mEUR

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7 7.1

Human Resources & Logistic Human Resources

Human Resource is the common term associated with the hiring and development of employees. To reach the company goals, the department has to maintain a clear oversight of all areas concerning personnel. Organizational chart of your bank (with all possible business areas):
Management

Business Banking Lending Business

Business Banking Deposit Business

Investment Banking

Wealth Management

Logistics (PT / IT)

As a member of the simulated banks management team, you are responsible for all HR-related issues for the five business units listed above.

7.1.1

Decision: Employments / Dismissal

Decisions regarding employments / dismissals are not part of the standard TOPSIM Universal Banking simulation. Depending on the module selection made by your instructor, the personnel decisions may be made by the simulation itself. In such a case, the decision field would be greyed out.

Participant Decision: You make decisions regarding the number of hirings (+) and dismissals (-) in each individual business unit. Hiring new employees is necessary when the current personnel resources are not sufficient and the bank has to pay costly overtime to current employees or even hire temporary workers. Dismissals make sense when there are idle employees in the bank, and therefore unnecessary costs are incurred. When hiring new employees, it must be considered that they require a vocational adjustment period during the first year, during which they cannot work productively. Employing and dismissing personnel is therefore very cost-intensive. Figures regarding employments and dismissals can be found in sect. 7.1.5.

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7.1.2

Decision: Training Days

Participant Decision: You must decide how many days in each period employees will spend in training and development. A decision must be made for each individual business unit. Giving employees training days in each period significantly increase their performance and also has an effect on the sale of services. When you have productive employees working at your bank, then you will need fewer employees for the same amount of work. Yet, having employees spend time in training takes them away from the daily operations of the bank. The training costs per employee/day amount to 1,000 EUR. Please refer to the report on Human Resources / Logistic for the employees' training status. In period 0, the following decisions had been made by the old management team (not all business areas have been available at that time): AREA Number days of training LENDING BUSINESS 4 DEPOSIT BUSINESS 4 LOGISTIC 2

In future periods, this decision can also be made in additional business areas within the bank (such as Wealth Management).

7.1.3

Decision: Utilization Acquisition and Service

Participant Decision: In this area, you must decide how many resources you would like to make available for acquisition and service (in % of the entire personnel on hand in the respective area). Both decisions have to be made for each individual business unit except for the Financial Management unit, in which no decision has to be made. You may not utilize more than 20% of the working hours available for acquisition and customer care. The rest of the resources go toward processing. In period 0, employees spent 5% of their time for each activities - acquisition and service. If many resources are invested in the acquisition of new business and providing good service to existing customers, it will have a positive effect on your market share directly (acquisition) or indirectly( via the service level). Please note that the training, acquisition, and customer care initiatives may take up a large amount of your capacities. Therefore, if the work that needs to be done in the back office cannot be performed by full-time employees and overtime (at the most 10% of the regular working hours), then the system automatically recruits expensive temporary personnel. For this decision, proper planning is essential. To guide you in the decisions, a planning tool is available in the participant system.

7.1.4

Decision: Incentive Bonus based

Participant Decision: Decide on the amount of bonus (in % of base salary), which will be paid in addition to the salary. Once again, this decision has to be made for individual business units. The bonus amount primarily affects employee satisfaction. High employee satisfaction lowers the turnover rate and thus the costs for new hires.

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In addition, a bonus that is higher than the bonus paid by a competitor may attract qualified employees, which, in turn, positively impacts the educational status of your banks employees. The old management has made the following decisions in period 0: AREA Bonus (in % of base salary) LENDING BUSINESS 4 4 2 DEPOSIT BUSINESS LOGISTIC

7.1.5

Employment Figures Period 0

BUSINESS UNIT
BUSINESS BANKING Lending Deposit Business Business FINANCIAL MANAGEMENT LOGISITC (PT / IT)

Employment Costs (EUR) Dismissal Costs (EUR) Training Period (Hours) Salary and Wages (EUR) Temporary worker compensation (EUR/Hour)

25,000 7,500 500 75,000 60

20,000 5,000 300 70,000 60

25,000 7,500 500 75,000 60

15,000 4,000 200 55,000 60

Industry salaries are average salaries in the different business units. The yearly salaries can be found in the economics section of the scenarios. Costs for overtime hours are 25% of the salaries.

7.2

Employee Capacities & Workload

A good service level and time spent on acquisition as well as employee qualification have a positive influence on the market share in the respective business unit. But it is thought that with high amounts of time spent on acquisition/service and training, the work-load capacity is not large enough to handle the daily operations. If the everyday operations can not be completed by the fulltime employees, even with overtime (10 % of the work-time), then the system will automatically hire temporary workers. With too many temporary workers, the quality of service is drastically reduced and customers will start to leave the bank. Along with your decisions, you should keep in mind that with a higher level of automation, the productivity and satisfaction of your employees increases. This means that with more productive workers, less personnel is needed to complete the necessary work. If the decisions regarding employment / dismissals are made by the system automatically (standard scenario), overtime and temporary employees are never needed. The system will automatically always keep enough personnel on-hand to complete the job without using the costly extra workers. The following is an example will assist in making decisions regarding employment and dismissal, in case that decision is not automatically made.

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Example (Employments / Dismissals not automated): General Figures: Total Hours worked per year (WPY): Hours per day (WT): Induction time new employees (ITE): Acquisition, Mentoring, Consulting: Training (Train): 1,825 Hours 8.2 Hours 500 Hours 0 % each 4 Days

Decisions:

So, the total number of hours available for each employee are: 100% 100% Acqu% Mentoring% Consul%

WPY

WT * Train ITE

= 1825

100% 100% 0% 0% 0%

4* 8.2 hrs 500 hrs = 1292.2 hrs

When the bank has 5,000 employees, 6,461,000 hours are available. Yet, when 7,000,000 hours are necessary, an additional 539,000 hours are needed.

418 more employees would need to be hired. This number is calculated automatically by the system in case the Hiring / Dismissals are automated (Overtime is not taken into account). To calculate the expected workload and necessary number of employees, a planning tool is available in the participants system.

7.3

Logistic Business (PT / IT)

The logistic business in the simulation is divided into branch networks and internal services with the areas of payment transactions (PT) and Information Technology (IT).

7.3.1

Branch Network
The bank in the simulation has 20 branches. Additional branches may increase the service quality. This would have a positive impact on the acquisition of new customers. From past periods, the following information is available:
INFORMATION REGARDING BANK BRANCHES

Number of Branches Value (Balance / mEUR) Depreciation (%)

20 90.0 10.0

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7.3.2

Decision: New Branches

Participant Decision: Decide if you would like to open new bank branches, and if so, how many (standard scenario). Depending on the adjustments made by the trainer new branches might also be rented. The bank network can be expanded. New branches are open for business immediately without any delay. Closing already open branches is not possible due to clauses in the contract.
FIGURES REGARDING BANK BRANCHES

Investment costs for new branches (mEUR) Rental costs per year, per branch (mEUR) Operating costs per new branch (mEUR)

5.0 0.4 1.5

The operating costs are incurred every year, not just for new branches but also for already existing branches as well.

7.4

Logistic Units
The banks logistics units include all investment and operating items required for regular business operations. Included in this are things such as IT and Online Banking. The current status of the logistics units is reflected by the automation level index, which can be influence by further investments in logistics. The previous management did not fully realize the savings potential that could be obtained when making proper investments in the IT department. With proper investments, a large savings potential could be realized.
INFORMATION REGARDING LOGISTIC UNITS (FROM PAST PERIODS)

Number of logistics units Value of assets (mEUR) Depreciation rate (%) Annual operating costs (Mio. EUR) Automation level (Index)

1,000 100.0 20.0 15.0 50

7.4.1

Investments in Logistic
Participant Decision: Decide if you will purchase logistic units (standard-scenario) and if so, how many. Depending on the adjustments made by the trainer new branches might also be rented.

You may improve your banks automation status by making additional net investments into new logistics units. Logistics units may be purchased (standard-scenario) or leased.
INFORMATION REGARDING LOGISTIC UNITS

Investment costs per logistics unit ( mEUR) Leasing cost (Leasing rate & Amortization / %) Operating cost per logistics unit (mEUR)

0.1 28.0 0.015

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The following information is available regarding the impact of net investments in automation:
NUMBER OF LOGISITC UNITS AUTOMATION LEVEL

400 1000 1200 1400 1600 1800 3000

10 50 66 77 87 94 100

ASSESSMENT OF AUTOMATION

AUTOMATION LEVEL INDEX 0 49 50 64 65 79 80 89 90 100

ASSESSMENT Insufficient Suffcient Good Very good Excellent

7.5

Indexes in the Human Resource and Logistic Business

Productivity Productivity is the INPUT required to achieve a certain OUTPUT. Increased productivity leads to improved employee performance and thus cost savings. The main factors influencing productivity are: Training Level Incentive Bonus Level of automation

The productivity level is determined separately for each business unit. The pertinent information can be found in the participation report Human Resources.

Training Status The training status is influenced by the factors such as training time and bonus.
ASSESSMENT OF THE TRAINING LEVEL

TRAINING INDEX 0 49 50 64 65 79 80 89 90 100

ASSESSMENT Insufficient Suffcient Good Very good Excellent

The training level is determined separately for each business unit. The pertinent information can be found in the participation report 12.1 Human Resources.

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Service Quality For a service company, high quality service is one of the main success factors and leads to a high market share. The quality of the banks' service is influenced by the following 5 factors: Training Level Employee Satisfaction Number of Hours Worked by Temporary Staff (not relevant if employments / dismissals are determined automatically) Service Level Number of Branches
ASSESSMENT OF THE SERVICE QUALITY LEVEL

SERVICE QUALITY INDEX 0 49 50 64 65 79 80 89 90 100 can be found in the participation report 12.1 Human Resources.

ASSESSMENT Insufficient Suffcient Good Very Good Excellent

The service quality level is determined separately for each business unit. The pertinent information

Employee Satisfaction High employee satisfaction increases employee motivation and consequently the service quality of the bank. The following 6 factors have a direct impact on employee satisfaction: Additional staff costs (not relevant in the standard-scenario) Incentive Bonus Number of Training Days Work-time per year (not relevant in the standard scenario) Proportion of overtime work (not relevant in the standard scenario) Hours worked by temporary employees (not relevant in the standard scenario)
ASSESSMENT OF THE EMPLOYEE SATISFACTION LEVEL

EMPLOYEE SATISFACTION 0 49 50 64 65 79 80 89 90 100

ASSESSMENT Vexed Unsatisfied Good Very good Excellent

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Marketing Business
The term Marketing refers to the banks activities intended for the current and future markets with the ultimate goal of satisfying customer needs in the long run and achieving competitive advantages. Marketing therefore is concerned with understanding customer needs and meeting those needs. In this simulation, four different customer segments exist. Each segment has its own needs and characteristics which become apparent in the separation of volume in the segments. (see Market Data Report):
CUSTOMER SEGMENTS ABBREVIATION

Countries & State-owned enterprises Large enterprises Small and mid-sized enterprises Private customers

States LE SME Private

8.1

Decision: Marketing

Participant Decision: Regarding marketing decisions, you are able to determine your marketing strategy. The market strategy determines how much money should be spend on the advertising of individual products / rating groups and services. To make decision, you will determine a budget (in mEUR), which you can distribute over the various segments based on priorities. By assigning priorities you decide how you want to deal with the individual customer groups. Use whole numbers from 0 to 3 (0, 1, 2, 3) on the decision form to determine your priorities. You may assign the same values several times.

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VALUE

PRIORITIES

0 1 2 3

Not a priority Slight priority Moderate priority High priority

The advertising budget for money transfer only has an effect on the money market and current account.

8.2

Sample Advertising Calculation

If you made the following decisions:

Then the advertising budget gets divided up as follows: States Customer rating +++ Customer rating ++ Customer rating + 1 mEUR 3 mEUR -LE 4 mEUR 6 mEUR SME -2 mEUR

Sample calculation, Customer rating +++/LE:

The advertising budget for customer rating +++ totals 3 million Euro and sum of the priorities is 3. Therefore, 1 million Euros goes to the states and 2 million Euros goes towards large enterprises (LE).

The advertising budget for customer advertising is 3 million Euros and the sum of the priorites is 3. Therefore 1 million Euros goes towards the customer rating + and 2 million to customer rating +++.

The advertising budget of 5 million Euros in customer rating does not get allocated, as no priorities were set. Advertising generally has a positive effect on your publicity and the market share of the individual product / rating (i.e. the customer groups). Please note the effect of each additionally invested Euro has less of an effect than the previous one. Also, make sure that the impact of your decisions is also dependent on the decisions of your competitors.

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