If borrowers suffered huge losses that can't be covered by insurance, or if the insurance or guarantees are not enough for the debts, the loans should be regarded as bad loans and written off in a timely manner.
My first reaction is why this should fall on the banks' balance sheets? Shouldn't the gov't step in and guarantee these loans? My second reaction is that this is not surprising – the gov't is used to banks as policy institutions. In the past, there was no distinction between Beijing saying that it would guarantee the NPLs and the banks doing it. Same deal.
These days things are different, though. The old policy banks have listed and now have significant equity held by foreigners. I would guess these investors might not be too happy having to shoulder the burden here when the entire country/government could be doing so.
Similar arguments with the sub-prime crisis in the U.S. Who should be responsible: society as a whole, the banks, or the folks that took out bad loans? What's different here is that there is no one "at fault". Neither the borrowers nor the banks did anything wrong, unless you want to blame folks for living in a quake zone or the banks for lending in those circumstances. Kinda cold-blooded thinking that you'd find in a political economy book or something, but not an argument that will win you any friends.
So should the banks or society at large pay for this?