Restoring confidence is the critical factor and for this (as Bagehot observed) central banks should “lend freely, but at a penalty rate”. Insolvent institutions must be separated from the solvent, dealt with, and the remaining institutions supported. None of this is easy. Intractable problems of moral hazard exist, but this should not be allowed to paralyse action.
Serious money will be required to fix the problems. Experience over the past couple of decades shows just how expensive these financial sector rescues can be.