Professor William Black:

They would respond. At the end of the day, do we make more money? We would all make a lot less money. However, in any society there is a significant proportion of people who are not creditworthy, and they will agree to pay a higher interest rate. That higher nominal rate, if you do not establish loss reserves, has to show up as a spread — a very big positive spread. It is just mathematics and accounting at that point, although in this regard I would emphasise something I have not emphasised: the really pernicious part that gets added on is when a lot of this income is non-cash. You have to understand the basics of accrual accounting. Is the difference between accrual and cash accounting familiar? With non-amortising or, at least, non-fully amortising loans — Ireland has had these — banks are booking as income things that they have never received in cash. That is how accrual accounting works. I can agree to do lots of things where I am not actually paying in cash. That is why people make bad loans or why bankers make deliberately bad loans. They will create this phoney income whereas trying to make good loans would produce real losses.