Simulation of competitive prices for banking services

Formation of prices for their services attractive to customers, but not at the expense of their own interests, is a constant concern of the commercial bank under conditions of acute interbank competition. Therefore, the article proposes alternative methods of management of competitive pricing in banking using mathematical modelling and application of modern computer technology. When determining the optimum current prices for deposit and credit services one must take into account the level of the prices of other services provided by the Bank, which is possible only within the framework of adequate mathematical models of the commercial bank. These models need to connect to a single node of the contradictory trends: prices attractive to customers and lower credit and higher deposit rates than in other banks in the region, with the desire of the Bank to maintain a desired level of profitability. The main factors of such models are the spread understood as the difference between the average rate and the average rate of return on equity, the Bank and leverage understood as a very aggregated balance sheet structure characteristic. The mathematical relationship between these three factors shows that increasing leverage, that is, a structural change in the balance, helps reduce the spread, while maintaining the same level of return on equity. In turn, lowering the amount of spread provides the ability either to increase the weighted average interest rate, or to reduce the average credit rate, or both. Ultimately, this leads to increased attractiveness of commercial bank rates and an increase in its price advantage. Using these models, one can get the empirical formula dependencies for any bank between the three above mentioned factors: spread, profitability and an expertly detailed balance sheet structure, based mainly on the quarterly accounting report (Forms 101 and 102), which is very important because of its accessibility. This formula can be used to adjust the financial flows of the commercial bank to increase its price advantage in the future.

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