Across the life of the loan the banks borrowing costs are and will be well below the interest rate he is paying. The risk of not getting principal back has been lowered by reducing the borrowers rates, it hasnt gone up.
Wow, that 2nd one was a wacky twist on my analogy. I dont know many individuals whose personal income is underwritten by borrowed money. You cant lose money you never had. Making less than you hoped for or were promised does automatically create a loss.