America’s banking crisis presents choices both perilous and promising. Perilous, because the failure to act intelligently will lead to the most serious economic collapse since the Great Depression. As much as 25% of the U.S. banking system—representing assets of more than $750 billion—has begun to post such massive loan losses that it must focus on collecting loans rather than making them. Healthy banks, shaken by their competitors’ plight (and worried about more intense scrutiny from bank examiners), are losing confidence in their ability to make sound loans. This credit crunch has the potential to turn a mild recession into a downward economic spiral that feeds on itself.
A version of this article appeared in the May–June 1991 issue of Harvard Business Review.