Spanish banks claimed to have excess reserves long after they were depleted and in effect there was profit smoothing and earnings management, which made banks look healthy when they were in fact, quite the opposite. The Spanish case exemplifies the limitations of any provisioning framework in preventing exuberance in bank lending to inherently risky sectors of the economy.
Economic cycles can be too powerful to negate the impact of prudential rules to some extent if there is serial underestimation of risks. While partial recognition of loan losses can buy some time in the short run, in the long run it leads to more problems due to loss of credibility.