Commercial banks are similar to many other businesses in that they are in business to make money (usually for shareholders). But banks are quite different from other businesses that sell tangible products or provide services. Banks don’t buy raw materials and turn them into products, nor do they only provide a service or advice (they do in many cases provide financial advice, but that’s not usually the bank’s primary business). Fundamentally banks are a financial intermediary; that is, they buy and sell money. Basically banks take customer deposits (buy money) and they loan it out to other customers (sell money).
If you looked at a bank’s balance sheet you would see four broad categories of assets: loans, securities, overnight investments, and other assets. On the liability or funding side you would also see several broad categories: deposits, wholesale debt, overnight borrowings, other liabilities, and finally equity (or capital).
Ultimately banks make money by finding the right mix or balance between assets and funding. It’s a balancing act and the financial management process is often called Balance Sheet Management or Asset/Liability Management.
BANKdynamics give you the opportunity to assume the role of a senior bank executive. It will be your job make decisions regarding loan rates and total dollar volume. How much business do you want and what credit risks are you willing to take? Can you set your deposit rates to generate acceptable deposit volumes? Can you deal with aggressive competition? You’ll also have the opportunity to add or take away from your overhead expenses (hire or fire people). And you can make decisions regarding your capital position (should you pay dividends, or sell more stock?).
BANKdynamics will expose you to several key bank management issues; for instance what financial measurements or targets do banks use to gauge their financial returns? Also, how do banks measure and manage their three primary financial risks (Asset Quality, Liquidity, and Interest Rate Risk)? As the new management team for the simulation bank you’ll be asked to set managerial goals for risk and return.
The key component of BANKdynamics that will help you learn about balance sheet management is the What-If. The what-if is a collection of decisions or attempts at changing the bank. You can ask as many what-ifs as you like. You can try completely different strategies and compare the results. Here is a post that talks more about the benefits of the what-if.