http://www.federalreserve.gov/newsevents/speech/Bernanke20060612a.htm"Risk-management principles are now ingrained in banks' day-to-day credit allocation activities. The most sophisticated banking organizations use risk-rating systems that characterize credits by both the probability of default and the expected loss given default. Consistent with the principles of the Basel II accord, the largest banks evaluate credit decisions by augmenting expert judgment with quantitative, model-based techniques. For instance, lending to individuals once relied mainly on the personal judgments of loan officers and was thus highly labor-intensive and subjective. Today, retail lending has become more routinized as banks have become increasingly adept at predicting default risk by applying statistical models to data, such as credit scores.
Similarly, new analytical tools and techniques have made lending to corporate borrowers highly quantitative. Among these tools are models that estimate the risk-adjusted return on capital and thus allow lenders to price relevant risks before loan origination. Other tools include proprietary internal debt-rating models and third-party programs that use market data to analyze the risk of exposures to corporate borrowers that issue stock."
"Since the mid-1990s, Federal Reserve supervisors have rated banks' risk-management capability as well as their financial condition as part of the examination process. Last year the Federal Reserve introduced a revised rating system for bank holding companies, under which each company receives a rating specifically for the quality of its risk management. This rating includes the four key elements of sound risk management that I just mentioned.
The increasing supervisory focus on risk-management practices has also had a large influence on the practice of bank supervision. Traditional supervision consisted primarily of periodic assessments of loan quality. In the early 1990s, bank supervisors began to concentrate more on the forward-looking issues of risk and whether the bank has the infrastructure to manage risks. Under this approach, examiners focus their on-site reviews on those activities that appear to pose the greatest risk to the banking organization. The objective is to address weaknesses in management and internal controls before financial performance suffers rather than being satisfied with identifying what went wrong after the fact.
At the heart of the modern bank examination is an assessment of the quality of a bank's procedures for evaluating, monitoring, and managing risk, and of the bank's internal models for determining economic capital. These models link capital to risk-taking and help banking organizations compare risks and returns across diverse business lines and locations."
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Seems like these geeks were pretty enamoured with their new 'tools'.
