ProBanker Exercise 2 (Regional Bank)

This assignment will demonstrate the sensitivity of loans and deposits to changes in interest rates (price

elasticity of demand) and its impact on discount window advances. The basic bank in ProBanker has the

following features.

a. Demand for loans will increase if interest rates are reduced (some customers will remain loyal,

but others will take the opportunity of the lower rates).

b. Supply of deposits will increase if interest rates are increased (some customers will remain loyal,

but others will take the opportunity of the higher rates).

c. If loan demand exceeds available funds (from deposits, CDs and equity), the program will force

banks to borrow from the central bank through the discount window advances at a penalty rate.

d. Federal funds are short term loans between banks. Participants can borrow federal funds as

non-depository source of funds. If there are excess funds at the end of the quarter, ProBanker

will sell them to other bank as federal funds sold.

Please note that in Autosim you are playing solo against the computer. If you are in a competitive game,

the results can be different because demand and supply are affected by the decisions of your

competitors.

Assignment 2:

1. Create a personal Autosim.

a. Click on Games.

b. Click on New Autosim game.

c. Select Assignments Regional Bank template in using template.

Note: Make sure NOT to choose Sample Regional Bank template.

d. Type a name for the new Autosim in New game's name

e. Example "John Roger's Assignment 2"

f. Click on Create Game

g. You can create as many Autosims as you wish.

2. Input decisions to your new Autosim. There are five categories of decisions - Bank Treasury,

Asset-other, Asset-loans, Liabilities-deposits, Bank-general.

We will reduce interest rates of all our loans by 0.3% to increase the demand for loans. To fund

this expected increase in loan demand, we will increase the interest rates offered on all our

deposits by 1%. We then simulate the game and observe the changes from quarter 0 to quarter 1.

Click on Autosim Games (on left, in blue) or Games on top (in red)

a. Select your newly created Autosim.

b. Click on Play bank.

c. Input and update Decisions.

d. Remember to click Save before you go to the next set of inputs.

3. Bank Treasury - change the following:

a. Federal Funds Purchased (not Sold) = $50,000.

b. 360 Days CDs to Issue = $50,000.

c. The remaining boxes should all be zeroes.

4. Asset-other - change the following:

a. Planned required reserves = $25,000.

b. New Bonds to Purchase = $15,000.

c. New provision for loan losses = $500.

5. Asset-loans - change the following: reduce all loan rates by 0.3%.

a. Fixed-rate loan: Reduce loan rate to 9 and keep corporate standards as normal (0).

b. Floating-rate loan: Reduce loan spread to 3.7 and keep corporate standards as normal

(0).

c. Installment Loans: Reduce loan rate to 10.7 and keep advertising at 150.

d. Mortgage loans: Reduce loan rate to 8.7 and keep advertising at 80.

6. Liabilities-deposits - change the following: Increase all deposit rates by 1%

a. Corporate demand deposit: Keep as is (0,580,100).

b. Retail demand deposit: Keep as is (0,410,100).

c. Retail savings: Increase deposit rate to 6 and keep advertising as 140.

d. Retail CDs: Increase CD rate to 7 and keep advertising at 290.

e. Long-term retail deposits: Increase deposit rate to 8.5 and keep advertising at 60.

7. Bank-general - change the following:

Keep as is (0, 0)

8. Simulate next period (on left side of the screen). After a few seconds, you will notice a flicker and it

should say End of Period 1. You are ready to review the results.

Answer the following questions.

Download the Excel file in Reports to answer the questions. Also consult the student manual available

in the Help folder (top right)

a. Rates on fixed, floating, installment and mortgage loans were reduced by 0.3 percent (from 9.3%

to 9.0% etc.). Which loans, in percent change, were impacted the most and which the least?

b. Rates on savings deposits, retail CDs and long-term retail deposits were increased by 1%. Which

deposits, in percent change, were impacted the most and which the least?

c. You put in $25,000 for reserve requirements. Why is the reserve requirement showing a different

number? Explain.

d. Explain the numbers under "excess reserves" and "discount window advances."

e. There are no interest rates for retail and corporate demand deposits. What likely factors can

explain the change in volume of deposits?

Assignment 2 (Continued)

9. Input decisions for quarter 2 as given below:

10. Bank Treasury - change the following:

a. Federal Funds Purchased (not Sold) = $50,000.

b. 360 Days CDs to Issue = $50,000.

c. The remaining boxes should all be zeroes.

11. Asset-other - change the following:

a. Planned required reserves = $25,000

b. New Bonds to Purchase = $15,000

c. New provision for loan losses = $500

12. Asset-loans - Keep interest rates, corporate loan standards and advertising the same.

a. Fixed-rate loan: Keep loan rate at 9 and standards as normal (0).

b. Floating-rate loan: Keep loan spread at 3.7 and standards as normal (0).

c. Installment Loans: Keep loan rate at 10.7 and advertising at 150.

d. Mortgage loans: Keep loan rate at 8.7 and advertising at 80.

13. Liabilities-deposits - change the following: Increase all deposits (except demand deposits) rates

by an additional 1%

a. Corporate demand deposit, keep as is (0,580,100).

b. Retail demand deposit, keep as is (0,410,100).

c. Retail savings: Increase deposit rate to 7 and keep advertising as 140.

d. Retail CDs: Increase CD rate to 8 and keep advertising at 290.

e. Long-term retail deposits: Increase deposit rate to 9.5 and keep advertising at 60.

14. Bank-general - change the following:

Keep as is (0, 0)

15. Simulate next period (on left side of the screen). After a few seconds, you will notice a flicker and it

should say End of Period 2.

Answer the following questions.

a. Rates on fixed, floating, installment and mortgage loans were reduced further by 0.3

percent. Which loans, in percent, were impacted the most and which the least?

b. Rates on savings deposits, retail CDs and long-term retail deposits were increased by

1%. Which deposits, in percent, were impacted the most and which the least?

c. Explain the numbers under "Reserve requirements," "Excess reserves" and "Discount

window advances."