Dynamic provisioning system was put in place in Spain by its Central Bank, Bank of Spain in July 2000 to cope with a sharp increase in credit risk on Spanish banks’ balance sheets following a period of significant credit growth during the late 1990s. Intense competition among banks had resulted in inadequate loan pricing.
Moral suasion also proved to be inadequate in inducing banks to become more conservative. There was a significant reduction in non-performing loans in the second half of the 1990s indicating very low specific provisions. In fact, in 1999 Spain had the lowest ratio of loan loss provisions to total loans among OECD countries.