In theory banks price risk using interest rates. That is to say that high risk individuals have to pay a higher interest rate on their debt than lower risk individuals. This reflects the banks concern that they won't get paid back.
If they (the banks) are doing their jobs right then having their highest risk people default is already covered by the interest rates other less risky clients are paying.
The trick though is actually making the bank take the loss which is something they have worked around with the help of the various governments. And that is where we get a conflict of interest where the bank is pricing the loans with the expected risk but actually taking much less risk due to government back stops. That difference is, as you would expect, profit for the bank.
Banks do take the loss via bankruptcy, or people just not repaying. If the banks had lobbied the government to repay these debts with taxpayer money, I would agree that this was trying to eat their cake and have it. But the government's actions go too far in the other direction. They impose a loss on the banks that the banks would never have expected or priced in.
In theory banks price risk using interest rates. That is to say that high risk individuals have to pay a higher interest rate on their debt than lower risk individuals. This reflects the banks concern that they won't get paid back.
If they (the banks) are doing their jobs right then having their highest risk people default is already covered by the interest rates other less risky clients are paying.
The trick though is actually making the bank take the loss which is something they have worked around with the help of the various governments. And that is where we get a conflict of interest where the bank is pricing the loans with the expected risk but actually taking much less risk due to government back stops. That difference is, as you would expect, profit for the bank.