As a result, it became necessary for them to either sell more assets to maintain adequate capitalization levels or to reduce their loan values. What started as a liquidity problem quickly turned into a solvency problem.
In this respect, policy measures require a revision of the pro-cyclical elements of the Basel II guidelines; the use of stress tests in lieu of value-at-risk for new risks or products with a short history; the use of “dynamic provisioning” as introduced by the Bank of Spain, an approach that involves building up anti-cyclical buffers during expansions and offers the possibility of drawing them down during recessions.