In 1995, in Sanya City, China, the Rural Credit Union raised interest rates from 9.2% to 10.8% on one-year savings accounts, hoping to attract new deposits to the bank. Instead of attracting deposits, however, the change provoked its principal competitor, the Hainan Development Bank, to increase deposit rates as well. As a result, capital costs increased at both banks, without a corresponding increase in deposits, and profits declined.
Advocate as to whether you believe the government should step in here, or not? What could the government do to improve the outcome, or make matters worse?