Banking Systems Simulation
Banking Systems Simulation
A bank's core business, credit activity, is centered on borrowing and lending, thus mainly dealing with two components: money and risks.
The first component, money, seems to be the simplest to measure, as all balance sheets and income statements report only money values. In fact, the different contracts, timing, and liquidity require much more attention than expected.
Every economic activity implicitly includes risk, as the economic framework always includes uncertainty. But a bank's activity is centered on risk, as its core business is in borrowing money, and lending it, bearing all risks of counterpart: default, maturity transformation, market values variation, liquidity, and so on.
Diverse layers of bank activity are cross-linked, and take part in maintaining the equilibriums in terms of revenue, economic stability, and operational activity. As a consequence, the bank's activity analysis is always complex.
The ways for analyzing credit activity are multiple.
On one hand, the banking activity is a specification of firms management, so it can be analyzed with the same attitude in terms of internal processes, costs and income, business models, personnel management, and so on.
Another possibility is to evaluate the activity results of banks from the outside, by means of regression analyses, so as to find a posteriori a description of their actual activity, results, and business models distribution and evolution.
Banks play a key role in financing the real economy, thereby sustaining and promoting the economic growth; their activity is often considered to be of national interest, and in some countries it is directly held by public companies.
In fact, the credit support of a firm or sector can substantially change its evolution and growth; choosing which firm to finance or which sector to support can be in some cases more effective than some public policy interventions.
Other fundamental aspects of banks activity are related to the volume of money managed in stock exchange and bonds markets, where the buying and selling activity can significantly affect values. Even when considering issuers of large dimensions, as in the case of sovereign bonds, the bank's attitude to buying or holding bonds to maturity can be of fundamental importance, and often the interest of governments in keeping the availability of banks in this can sometimes affect the government policy toward the banking sector.
This key role in sustaining the economic growth and the fact that banks are typically large firms induces specific attention toward the bank's activity, as the banks' default not only stops the support of economic growth but also can induce huge effects of market instability, lack of confidence in banks and in savings, bank runs, and disruptive effects on the real economy.
Thus, the analysis of a bank's activity, and of its different layers and interconnections, and the supervision and regulation of banks, are of fundamental importance for preserving savers' confidence in banks, the bank's action in channeling savings to firms, thus sustaining economic growth and preserving economic and financial stability.
The credit activity also carries a specific characteristic, as it involves buying and selling money-different maturity, contracts, risks, but always money. There is no actual goods production or transformation. This simplifies some aspects, but also induces a greater interrelationship between the different activity layers; so, as an example, there can be no strict separation, as it happens in industrial or commercial activities, between real goods or services production, and financial activities.
At a first glance, a bank's balance sheet seems to be quite similar to any other firm's balance sheet: The assets side mainly includes customer loans, bonds, interbank credits, and some other asse