Every 1% interest rate hike raises loan losses by 0.1% — more in rich countries

A new study finds that when central banks raise interest rates by one percentage point, banks lose an extra 0.1 percentage points on their loans. This effect is stronger in wealthier countries than in developing ones. The impact is even greater when debt is high, the economy is weak, or central banks are shrinking their balance sheets.

For years, banks and regulators have used rough estimates to guess how interest rate changes affect loan defaults. This paper provides a concrete, measurable rule of thumb. It means banks can now more accurately predict their losses when central banks tighten monetary policy, especially in specific economic conditions. This could lead to more precise risk management and capital planning.