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Thread. @BIS_org suggests that during this crisis, banks should provide support only to illiquid firms and not to insolvent ones. Is this suggestion useful in developing countries?

Some thoughts:

This sounds like a reasonable suggestion for any banking sector. But... https://twitter.com/BIS_org/status/1265949189499912192

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If banks do not lend to insolvent firms, these firms would probably shut down and definitely not pay their employees.

In a normal situation, this would be part of the process of 'creative destruction'.

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In a growing economy, the employees would probably get alternative employment.

But not during a lockdown or when the economy is in a recession.

The shut-down of insolvent firms would result in their employees having no employment or income in the foreseeable future.

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This wouldn't be a huge problem if there were social safety nets for such people. But most developing countries do not have such fallback mechanisms.

In the absence of such safety nets, jeopardizing jobs can have disastrous effects on the lives of these people.

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So 'creative destruction' should probably take a back seat for now.

And banks should provide some support even to insolvent firms in order to keep their employees from losing all financial security.

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Of course, as I have argued earlier, solvent firms should still get first priority.

But a 'rule' that no insolvent firm should get support from banks may not be tenable in developing countries.