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A bank examination includes a series of tests and reviews that ensure a bank is sound and able to meet its obligations. Government regulators are often the institutions that both regulate banks and conduct bank examinations, which may be on a frequent or infrequent basis. The most important pieces of information during this examination include the bank’s assets and liabilities. Other items under review include the bank’s ability to meet government regulations and operate under specific laws that protect consumers from inappropriate actions. A third-party accounting firm or external government entity may be the organization that conducts the examination.
Banks and other financial institutions typically go under thorough reviews and examinations by outside regulators or other entities. The items most often under review in the bank examination can include adequacy of capital, quality of assets, management, and earnings for a given period, along with asset liquidity and sensitivity to risks in the market. Each section of the review process most often has a specific set of control limits that regulators see as normal under other observations and reviews. Banks that fail to meet these guidelines may receive notice from the government about their inability to operate. In some cases, the government may take over banks in order to preserve consumer assets.
The outside agency that begins the bank examination may first start with paperwork given to them by the financial institution. Upon review of several months of historical data, the examiner may make notes on items of concern. For example, the adequacy of capital and quality of assets may all be determined through a review of paperwork. After this initial review, a visit by the bank examiner may be necessary to meet with the financial institution’s management team. This on-site review can help confirm any expectations of inadequate operations and potential pitfalls for future years.
As the reviewer conducts the bank examination, the financial institution may give each section or item a score. The score is usually on a scale such as 1 to 10 or some other scale that indicates the strength of a certain item. The total added together may result in an overall score for the financial institution. The number may result in closer scrutiny or a commendation on how well the bank operates and manages its consumers’ funds. Either way, the examination should improve the bank or stop it from operating in a dangerous manner.