Measuring Bank Net Interest Margin: A Game Theory Approach

This paper explores the extent of bank Net Interest Margin (NIM) for the uncompetitive banking market. Our contribution to the literature is twofold. First, we extend the initial Ho and Saunders model to capture determinants of bank NIM in the uncompetitive market. Second, we look for the optimal bank NIM for the uncompetitive market. We apply the Dynamic Games of Incomplete Information of Game Theory framework to extend the Ho and Saunders model. Using data from the Indonesia banking market for ten years, there are three groups of banks in the sample. The first group consists of all banks in the industry. Second, a competitive bank. Third the uncompetitive bank. We found that the proposed Game Theory model has a smaller deviation from the optimal and actual NIM than those of from the initial Ho and Saunders. Besides, this study also found that the more homogeneous banks in the market, the smaller the difference between optimal NIM of Game Theory model and the initial Ho and Saunders model