This chapter explores the effects of creating a corporate bond market in emerging market economies on the efficiency of capital allocation. It argues that creating a corporate bond market and decoupling the banking sector from public finances reduces the fragility of the banking sector and shields a greater proportion of corporations from the consequences of government debt crises. The formal model in Bolton and Freixas (2006) is also used to evaluate the effects of different types of policies, such as financial liberalization or the creation of a market for collateralized debt obligations on the efficient allocation of capital and the incidence of debt crises.