As this is a necessary correction, it is not a process that policymakers should seek to prevent. However, it is a process that needs to be properly managed. Deleveraging can essentially take two forms: a “good” form and a “bad” form.
The “good” type is where banks quickly carve out non-performing or non-core assets and raise equity, allowing them to restart lending to new, creditworthy clients. The “bad” type is where they sell good assets and hold on to non-performing assets in the hope that their value recovers. This tends to create so-called “zombie banks” and leads to a prolonged period of low credit growth.