[gmunu]

This is a very interesting comment and I used to think similarly, but Matt Levine over at Bloomberg convinced me over several articles (couldn't find exactly which ones on a casual searching) that it's a little more subtle than that. In contracts between big companies, this is absolutely true. Financial institutions expect that companies will act as rational economic actors and discharge their debt when it's beneficial for them to do so. But in contracts with very small business or with individuals (say mortgages), people act economically irrationally, constrained by social norms, and not dumping their debts as quickly as the laws allow. This results in lower delinquency rates than would otherwise be the case, so the actuarial models allow for the pricing of lower interest rates, more lenient credit policies, etc. If individual people starting acting like big corporations, then default rates would go up and correspondingly interest rates on things like mortgages would go up to.

This isn't to say that that state of the world is worse. It might be better! Certainly we shouldn't discount the burden it places on people to feel guilty over their debts. That's real cost to them and to society generally. But if the social norms around debt changed, they wouldn't change in a vacuum. Probably rates would go up and that's a real cost as well.

[sergiosgc]

You make a common economy error. You are assuming the price of a good or service is defined by its cost. This is only true in very liquid (competitive) markets. Banking is no such market.

You make a perfect case of justifying that the cost of providing the lending service would be higher. However, prices are not defined by cost. They are defined, loosely, by what the market can bear. The cost is a lower limit, but nothing more. Namely, it does not define the price.

For the price of a good or service to approach cost of goods, you need very strong and constant competitive pressure. The banking market, in most countries, is not nearly competitive enough.

[gmunu]

It is certainly not the case that cost == price, I agree. Price is determined by supply and demand. But if you change the cost of mortgages, you probably change their supply curve and hence the market clearing price. To argue that raising the cost of mortgages doesn't change the market clearing price is make a pretty strong claim about the shape of supply and demand curves.

[refurb]

The banking market, in most countries, is not nearly competitive enough.

You don't think money lending is competitive enough? You can get loans for houses, cars and school at just a few points over the risk-free rate.

I'd say the banking market is very competitive since they are all offering the same thing, money (a commodity).