The weakness in the financial sector, in turn, was encouraged by the moral hazard associated with perceived wide-ranging government guarantees and political interference in lending decisions by banks. As a result, banks had insufficient incentives to manage their credit risks and firms had inadequate incentives to limit their leverage and make sound investments.
There are two broad lessons that emerge from this episode and earlier experiences involving financial crises. First, to reduce the vulnerability of an economy to banking and financial crises, a high priority should be given to sound corporate governance, narrow and explicit government guarantees, and adequate prudential supervision of banks.