Economic effects of financial crises

Confronted with a financial crisis, governments in many developing countries protect their banks from bankruptcy by allocating resources to the least efficient debtors - loss making firms whose bankruptcy would lead to the failure of the banking system. This crowds out efficient activities that could lead to economic recovery. Such misallocations of resources, and the destabilizing macroeconomic forces they generate, will delay economic recovery in a way that mimics bankruptcy processes. Restructuring of banks should be used to bring about restructuring of the real sector, the failure of unviable firms (by foreclosing on the collateral and selling off assets) or the forced restructuring of troubled but viable firms.