But you're only looking at this from a single perspective, where every single bank starts charging the same 4% simply because of irish heritage.

What if, one bank started doing it because they used this model. But another bank doesn't, because they don't believe this model?

If you were an irish person, you would just move banks. And if it turns out, indeed, that the first bank was over-charging the 4% (ie., no irish person defaults due to their being irish), then they've lost business for no reason, and the 2nd bank got more business.

However, if it turns out that being irish _does_ indeed cause you to default more, then the bank charging an extra 4% was correct. The 2nd bank, upon finding proof of this, would also start charging an extra 4% (otherwise, they'd be losing out money to the first bank).

So in the end, a bank can only charge the most appropriate interest rate for the market to bear.