Question

QUESTION 5 In Australia the 'Big Four' banks (Commonwealth Bank, NAB, ANZ Bank and Westpac) dominate Australia's banking sector. A bank's decisions to maintain, raise or cut interest rates are all influenced by the actions of the other banks. Answer the following questions: a. Regulation of the 'Big Four' banks is conducted mainly by ASIC (Australian Securities and Investment Commission) and APRA (Australian Prudential Regulation Authority), which have strict rules regarding the establishment and maintenance of a financial institution. Does this requirement constitute a barrier to entry? Type Y for Yes or N for No b. NAB and Westpac announce that they will be maintaining their interest rates but the Commonwealth Bank and ANZ are stil undecided. The payoff matrix (with payoffs represented in millions of dollars, Commonwealth being the left player and ANZ being the player on the top row) is shown below. What is the Nash equilibrium? the following format: strategy of left player, strategy of top player. For example, enter your answer as CM to represent (Cut, Maintain) or MM to represent (Maintain, Maintain) etc. Ifa Nash Equilibrium does not exist, enter N for none Type your answer in Maintain (M) Cut (C) Maintain (M) 125,100 175,50 Cut (C) 65, 160 70, 60 c. Does this game satisfy the criteria for a Prisoner's Dilemma? Type Y for Yes or N for No. d. Is there the potential for consumers and borrowers to benefit from this outcome? N for No. Type Y for Yes or

Answer 1

Ans A)

A Bank's decision is always influenced by other banks' decision hence if other bank cuts the interest rate where the bank is question trying to maintain the inteest rate then their decision should get influenced and hence cut in rate is followed.

Therefore Commonwealth bank will not be ale to maximise the profit using the same rule of perfectly competitive msrket.Answer is N(No)

ANs 2)

Yes in this game we can see that ANZ bank has the dominating strategy to cut the interest rate becuase in any scenario they have higher payoff than that of being maintained the interest rates

Hence we can eliminate the strategy Maintain for ANNZ bank then we have only possible Nash Equilibrium is (Cut,Cut)=(70,60)

Ans C)

Yes This game is similar to Prisoner dilemma because the nash equillibrium is nor Pareto Optimal as we can observe that (M,M)=(125,100) could provide higher payoffs than the Nash Equilibrium , similar scenario as we come cross in Prisoners dilemma

Ans D)

Yes,

Consumers and Borroweers would definaetely benefit from this Banks' decision as their borrowing cost would reduce in near future.