Banks undergo reviews and examinations by external regulators or entities, focusing on capital adequacy, asset quality, management, earnings, liquidity, and risk sensitivity. The exam may result in closer scrutiny or recommendations to improve the bank’s operations and management.
A bank exam includes a series of tests and reviews that ensure that a bank is sound and able to meet its obligations. Government regulators are often the institutions that regulate banks and conduct bank examinations, which can be frequent or infrequent. The most important information during this examination includes the bank’s assets and liabilities. Other items under review include the bank’s ability to comply with government regulations and operate under specific laws that protect consumers from inappropriate actions. A third-party accounting firm or third-party government entity may be the organization conducting the exam.
Banks and other financial institutions often undergo extensive reviews and examinations by external regulators or other entities. Items most frequently reviewed in the banking exam may include capital adequacy, asset quality, management, and earnings for a given period, along with asset liquidity and risk sensitivity in the market. Each section of the review process most often has a specific set of control limits that regulators view as normal in further observations and reviews. Banks that do not meet these guidelines may receive a notice from the government of their inability to operate. In some cases, the government may take over banks to preserve consumer goods.
The outside agency that starts the bank exam may start first with the paperwork given to them by the financial institution. After reviewing several months of historical data, the examiner can take notes on items of interest. For example, capital adequacy and asset quality can be determined through a paperwork review. After this initial review, a visit from the bank examiner may be necessary to meet with the management team of the financial institution. This on-site review can help confirm any expectations of inappropriate operations and potential difficulties for future years.
As the reviewer performs the bank exam, the financial institution may give a score to each section or element. The score is usually on a scale like 1 to 10 or some other scale that indicates the strength of a certain item. The added total can result in an overall score for the financial institution. The number may result in closer scrutiny or a recommendation on how well the bank operates and manages its consumer funds. Either way, the exam should either improve the bank or prevent it from working in dangerous ways.
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