Professor Eamonn Walsh:

Suppose we are in the boom days of 2004, we go out and grant an additional 5,000 mortgages. That essentially means that now we have interest coming in on those mortgages. Our interest goes up. We will pay some money out from funds we have managed to get to support those mortgages, which hopefully we receive quite cheaply. Our overheads are probably much the same as they would otherwise be, which means our profit shoots up as a result of expanding the loan book. However, we all know that some of those mortgages will not turn out as anticipated. It is only later in the cycle that will be reflected in the financial statements. As a result, profits will inevitably be high because in the early years a loan generally performs.