Bank for International Settlements working paper finds 1 percentage point rate hikes raise loan loss rates by about 0.1 percentage points

The Bank for International Settlements has published a working paper examining how policy-rate increases feed through to realised bank credit losses across 113 advanced and emerging market economies over 1990 to 2022. In the authors’ analysis, a 1 percentage point increase in the policy rate raises loan loss rates by about 0.1 percentage points over a three-to-five-year horizon on average, providing a rule of thumb intended for use in stress testing and macroprudential calibration. Effects are materially stronger when tightening follows a loose monetary stance, private debt and inflation are high, the economy is in a downturn, fiscal policy is restrictive, central bank balance sheets are shrinking, and floating-rate lending is more prevalent. Under combinations of adverse macro-financial conditions, the same 1 percentage point rate increase can raise loss rates by about 0.2 to 0.3 percentage points. The paper also finds that the impact is larger in relative terms in advanced economies than in emerging market economies, and bank-level evidence from 3,350 institutions supports the country-level results, with the sharpest increases at banks that entered tightening with weaker asset quality.