Financial stability: Generally, any strains in the financial system are likely to be first reflected in the payments system, with settlements being affected due to liquidity issues faced by one or more of the participants. Due to the interconnected nature of payment systems, such disturbances have the potential to transmit themselves to other financial institutions as well, leading to issues of financial stability.
If banks had decided to call in non-performing loans, they would have been forced to write off existing capital. The fear of falling below the regulatory capital standards gave them the perverse incentive to continue extending credit to insolvent borrowers, gambling on the hope that the firms would recover or that the government would bail them out.