What is a Bank Examination?

Bank Examination is a regular inspection of banks (and other depository institutions), conducted periodically by a federal agency appointed by the country’s central bank. This process ensures a bank is operating within the scope of standards and regulations, abided by the law. It also reviews a banks financial stability, asset quality, risk profile, management of funds, lending policy and quality of the managing team.

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How Does a Bank Examination Work?

The inspection is done by the Comptroller of the Currency for National Banks and for the State Chartered Banks, the Federal Deposit Insurance Corporation (FDIC) or the State Banking Department conducts the examination. U.S. Federal Reserve Board conducts the inspection for bank holding companies. The examinations have two parts, the objective system is known as CAMELS and a subjective part contains notes. In CAMEL the C denotes capital adequacy. It is to ensure a bank is maintaining adequate capital to resist any damage caused by any shock to its system. The A stands for asset quality which includes loan and investment. The M is for Management. In this part, examiners evaluate the quality of the management team of the bank and confirm the leaders of the bank have a clear insight into their institution and know how to move forward adhering to the regulations. The E in this system denotes earnings. A banks customers deposit money in their accounts and some of these accounts earn interests from the bank, on the other hand, the bank lends these funds to the borrowers and receives interest from them. Here the examiners ensure the concerned bank is adequately maintaining the balance between the rate paid for funds and rate receive from borrowers as the banks earning depends on it. The L represents, liquidity. This test commonly includes the current ratio, quick, and the cash ratio. The S stands for sensitivity, it assesses how a bank would get affected by systemic factors and market risks such as interest rate change or political disturbance in the country. The examiners rate the banks in each of these categories within the scale of 1 to 5, where 1 is considered to be the highest. The scores of Bank Examination are not revealed in public or to other banks. Only the concerned banks management gets to know the score. Exemption 8 of the Freedom of Information Act protects this information from disclosure.