[jack-r-abbit]

But by your own words, this woman's bankruptcy does hurt other people... the people looking to get a loan later. They are now paying the even higher interest rate due to her bankruptcy being priced in. The more people that default, the higher the probability that the next person will default and the higher the premium the bank charges for that risk.

[rayiner]

The rates for subsequent borrowers will only go up if her bankruptcy was unexpected. That is to say, if the bank charged her interest assuming 10 of 100 loans would default, and she is one of those 10, then her bankruptcy does not change the interest rate the bank charges. On the other hand, if the default rate is higher than the bank expected, whose fault is that?

[jack-r-abbit]

They can only do so much to predict the future based on the past. When they fund loans today based on today's default rate they have no way to know what crisis hits in 3 years to cause a spike in defaulted loans. The system must correct itself with enough padding to cover the smaller fluctuations.