posted on 06-06-2019

Bank Examination

Updated October 1, 2019

What is Bank Examination?

A bank examination is a regular process of ensuring that a bank or lending institution is financially stable and obeying regulations while avoiding excessive risk. The CAMELS is a system used to rate banks.

How Does Bank Examination Work?

In order to ensure their financial strength, banks must undergo periodic examinations by a federal agency (usually the Office of the Comptroller of the Currency). These examinations include analyses of a bank's loans and investments, how it manages its funds, the risk profile of the bank (that is, the liquidity and profitability of the bank), and the bank's compliance with consumer banking laws. OCC examiners also review the bank's internal controls and management ability.

Bank examiners issue numerical ratings to the bank as a result of the examination. Dubbed the CAMELS system in the United States, examiners score each bank in six areas: capital level, asset quality, management, earnings, liquidity, and sensitivity to market risk. Banks score between 1 and 5 in each category, with 1 being the highest.

Why Does Bank Examination Matter?

Bank examinations have two parts: the objective CAMELS score and the more subjective notes section. Bank examination documents generally are not public—in fact, Exemption 8 of the Freedom of Information Act explicitly protects them from disclosure. This is ostensibly because disclosure would reveal which banks are in poor condition, which could panic shareholders and depositors. However, national banks must submit a Report of Condition and Income each quarter to the Federal Deposit Insurance Corp. (FDIC), and this is available to the public.