risk the banking industry has also made strides in managing credit risk. until the early 1990s, the analysis of credit risk was generally limited to reviews of individual loans, and banks kept most loans on their books to maturity. today, credit - risk management encompasses both loan reviews and portfolio analysis. moreover, the development of new technologies for buying and selling risks has allowed many banks to move away from the traditional book - and - hold lending practice in favor of a more active strategy that seeks the best mix of assets in light of the prevailing credit environment, market conditions, and business opportunities. much more so than in the past, banks today are able to manage and control obligor and portfolio concentrations, maturities, and loan sizes, and to address and even eliminate problem assets before they create losses. many banks also stress - test their portfolios on a business - line basis to help inform their overall risk management. to an important degree, banks can be more active in their management of credit risks and other portfolio risks because of the increased availability of financial instruments and activities such as loan syndications, loan trading, credit derivatives, and securitization. for example, trading in credit derivatives has grown rapidly over the last decade, reaching $ 18 trillion ( in notional terms ) in 2005. the notional value of trading in credit default swaps on many well - known corporate names now exceeds the value of trading in the primary debt securities of the same obligors. similarly, between 1990 and 2005, the market for loan syndications grew from $ 700 billion to more than $ 2. 5 trillion, and loan trading grew from less than $ 10 billion to more than $ 160 billion. asset - backed securitization has also provided a vehicle for decreasing concentrations and credit risk in bank portfolios by permitting the sale of loans in the capital markets, particularly loans on homes and commercial real estate. 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

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. both robust risk management and strong capital positions are critical to ensure that individual banking organizations operate in a safe and sound manner that enhances the stability of the financial system. more generally, strong capital helps banks absorb unexpected shocks and reduces the moral hazard associated with the federal safety net. why basel ii? in introducing the concept of risk - based capital ratios, basel i established the important principle that regulatory capital requirements should be related to risk. at various times, of course, supervisors have also made important adjustments to the basel i framework, such as the market risk amendment mentioned earlier. nonetheless, advances in risk management and the increasing complexity of financial activities have prompted international supervisors to review the appropriateness of regulatory capital standards under basel i, particularly for the largest and most complex banking organizations. the supervisory organizations have agreed that basel i, with its broad - brush system for setting the risk weights on various classes of bank assets, is increasingly inadequate for measuring risk and the appropriate level of capital for such firms. for example, under basel i, a bank's regulatory capital requirement takes no account of the specific risk profile of its commercial loan portfolio, deterioration in asset quality, the risks of certain off - balance - sheet transactions or fee - based activities, and actions banks may take to mitigate balance sheet risks. supervisors recognize that some of the largest and most complex banking organizations have already moved well beyond basel i in the sophistication of their risk management and internal capital models. as risk - management practices continue to evolve, the gulf between the determinants of minimum regulatory capital under basel i and what these banks actually do to manage risk will widen. most important, if the regulatory capital required of these organizations does not adequately reflect the risks they are actually taking, the safety and soundness of the u. s. banking system may be jeopardized. the u. s. banking agencies have proposed the adoption of the basel ii accord because it links the risktaking of large banking organizations to their regulatory capital in a more meaningful way than does basel i and encourages further progress in risk management. it does this by