Interest Rate Game and Symmetric Equilibria

This chapter analyzes Nash equilibria in the first stage of the financial intermediation game introduced in Chapter 1 (Intermediation Game), in which the banks choose their interest rates. It is assumed that the banks choose a Nash equilibrium resource allocation derived in Chapter 2 (Allocation Game) in the second stage. This chapter shows that if symmetric Nash equilibria exist, in which all banks offer the same deposit rate and the same loan rate, then the deposit rate is the same in all Nash equilibria. Loan rates need not be unique, but the expected returns on loans must all equal the deposit rate. Symmetric equilibria with and without credit rationing are characterized.