BANK INTERESTS

Banks usually use sampling model to decide interest rates. Historically in a given year around 2% of their costumers default. Due to this, banks need to charge everybody to make up the losses incurred due to these 2%, in addition to paying their employees. If the interest rate is raised too high, it may result in profit to the bank, but the clients may switch banks. Therefore probability theory can be applied to study and decide what are the best interest rates for a specific situation.