Bank Examination – Definition

Cite this article as:"Bank Examination – Definition," in The Business Professor, updated December 14, 2018, last accessed October 22, 2020,


Bank Examination Definition

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 bank’s financial stability, asset quality, risk profile, management of funds, lending policy and quality of the managing team.

A Little More on Bank Examination

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 bank’s 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 bank’s 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 bank’s management gets to know the score. Exemption 8 of the Freedom of Information Act protects this information from disclosure.

References for Bank Examiner

Academic Research on National Bank Examiner

Bank examiner criticisms, bank loan defaults, and bank loan quality, Wu, H. K. (1969). The Journal of Finance, 24(4), 697-705.

Potential insolvency, market efficiency, and¬†bank¬†regulation of large commercial banks, Pettway, R. H. (1980).¬†Journal of Financial and Quantitative Analysis,¬†15(1), 219-236. There‚Äôs a disagreement among bank regulators about the concept that the market can play a role in bank regulation. The bank security market is viewed by regulators s inefficient and do not have the necessary information to request sufficient risk premiums on banks obligations to influence the decisions of bank management. It can be said that the regulators could be right about the markets for banks that are small and medium‚Äďsized, but it can be said of the banks with an active market for their securities, if investors change the rates of return for the occurrence of raised potential of bankruptcy? If that is the case, then the question is, what time does the adjustment happen?

Stimulating bank competition through regulatory action, Horvitz, P. M. (1965). The Journal of Finance, 20(1), 1-13.

Regulation of bank trust department investment activities, Lybecker, M. E. (1973). The Yale Law Journal, 82(5), 977-1002.

” To Establish a More Effective Supervision of Banking”: How the Birth of the Fed Altered¬†Bank¬†Supervision, White, E. N. (2011).¬†(No. w16825). National Bureau of Economic Research. There was a light hand, and frequent panicks by bank supervisors under the National Banking System and depositor losses were also minimal. Shareholders had to carefully monitor bank managers and voluntarily liquidate banks fast if there were any signs of trouble. More disclosure led to mark assets to market which ensured prompt closure of insolvent national banks; the currency reinforced controller of the market discipline. The coming of the Federal Reserve weakened this era. Responding to some enquiries, the recent deal moved to a period of discretion-based forbearance with supervision.

Using market information in prudential bank supervision: A review of the US empirical evidence, Flannery, M. J. (1998). Journal of Money, Credit and Banking, 273-305. Alternative devices for governing any type of organization is provided by market and government supers=vision. Virtually all national governments have markets that are noninstituted and can regulate mechanism for banking forms, on the condition that the market-based mechanism does not adequately discipline banks. Is there evidence that supports this assessment? Why should banks be assured by the government and not other firms? The oversight of government displaces private efforts to check and govern financial firms. The proposition was part of the support from the evidence that both analysts and market investors could provide great result of corporate governance service.

Agent bank behavior in bank loan syndications, Jones, J. D., Lang, W. W., & Nigro, P. J. (2005). Journal of Financial Research, 28(3), 385-402. The usage of shared National Credit (SNC) Program data from 1995 to 2000 is extended beyond previous central work on syndications about bank loans. It is firstly assumed that recent trends in the volume and examiner based quality of credit value of loans syndicated via the system of banking. Secondly, a panel regression model is estimated to outline changes in an agent bank’s retained share of a syndicated loan about information asymmetries, capital constraints, loan age, and loan credit quality.

Challenges to the dual banking system: The funding of bank supervision, Blair, C. E., & Kushmeider, R. M. (2006). FDIC Banking Rev., 18, 1. The examination of the funding of bank supervisors in the dual banking system context is examined. Since 1863, in the United States, commercial banks have been able to choose to coordinate as national banks in addition to a charter issued by the Office of the Comptroller of the Currency (OCC) or as state banks with a charter issued by a state government. The determination of the charter determines the agency to supervise the bank. The FDIC under the supervisory capacity, and the Federal Reserve basically switch examinations and review with the states.

Social problems as landmark narratives:¬†Bank¬†of Boston, mass media and ‚Äúmoney laundering‚ÄĚ, Nichols, L. T. (1997). Social Problems,¬†44(3), 324-341. The examination of how claims makers selectively create instanced of alleged issues as ‚Äėlandmarks narratives‚Äô with individual attention to the theoretical practices of mass print media is examined and reviewed in this paper. Also, the analysis from the examination shows the violation of currency reporting at the Bank of Boston and how it became synonymous with ‚Äėmoney laundering‚Äô and the exploitation of official claim makers in the case to produce a sign of similar violations which then lead to a warrant for the policies.

The Regulation of¬†National¬†Banks’ Subsidiaries, Glidden, W. B. (1984). Bus. Law.,¬†40, 1299. Based on the assumption of various incorporated subsidiary companies, the importance within the banking industry, bank regulators and counsel devoted to the requirements legally and the constraints that applied to their operations, the responsibility issued on bank management to ascertain the prudent and lawful business conduct by both parent and subsidiary banks.


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