Federal Reserve staff notes that banks price higher interest rates to compensate for elevated credit risk at multiple levels. Using loan‑level data on 1.25 million mortgages and 284,000 credit card accounts, researchers confirm that borrower credit scores and loan‑to‑value ratios strongly predict loan spreads, though a sizable portion of spread variation remains unexplained. Regional risk also influences pricing: a 100‑basis‑point rise in local delinquency rates raises credit‑card APRs by about five basis points, a smaller effect than the 30‑basis‑point rise seen in jumbo mortgages. At the bank level, a 1 % increase in average net charge‑offs from 2008‑2019 correlates with a 0.6 % rise in average interest and fee income, indicating that higher risk portfolios generate higher earnings.
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https://www.federalreserve.gov/econres/notes/feds-notes/examining-the-relationship-between-loan-pricing-and-credit-risk-20250924.html
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