General Examination

What Is a General Examination?

A general examination is a regulatory measure set up to facilitate detailed, thorough inspections of banks. General examinations involve evaluating the management processes and activities of financial institutions (FIs) licensed to receive deposits and make loans to ensure that they are in compliance with laws and regulations and are operating in a sound manner.

Different governing bodies are responsible for assessing the health of banks. Usually, national banks are examined by the Office of the Comptroller of the Currency (OCC), state-chartered banks are inspected by the Federal Deposit Insurance Corporation (FDIC) or the state banking department, and bank holding companies are scrutinized by the Federal Reserve Board (FRB).

Understanding General Examinations

The general examination is typically conducted every two years. The bank examiners carrying out the exam will take an in-depth look at the bank in question, focusing a lot of time on its financial statements, while interviewing staff and managers on policies and procedures. 

The examiners will look at the bank's supervisory guidance, recommendations, and issues. They will delve into the bank's overall financial state, examine its trust operations, the health and efficiency of its electronic systems, and its performance in terms of meeting the credit needs of the community in which it operates. Examiners will also assess whether or not the bank is in compliance with state and federal regulations.

There are more than 2,000 examiners in the United States tasked with evaluating banks.

Information that bank examiners request during the process of a general examination includes:

Reviews associated with a general examination can occur both on- and off-site. Examiners may go over written information and reports in their own offices, and then head to the bank to perform detailed interviews with management.

Recording a General Examination

Once the general examination has been completed, the examiners will hold an exit meeting with the bank's management and perhaps with its board of directors (B of D) as well. During the meeting, findings will be presented, opinions will be aired out, and the bank will be issued with a rating. After this process is complete, the FDIC will publish a Report of Examination detailing its observations.

When evaluating the safety and soundness of an FI, examiners follow what is known as the CAMELS system: capital adequacy, asset quality, management, earnings, liquidity, and sensitivity (to systemic risk). Banks receive a ranking on a scale of one to five in each category, with one being the highest or strongest and five being the lowest or weakest.

Banks that receive an average score of less than two are considered to be high-quality institutions. Banks with CAMELS of four and five, on the other hand, will be placed on a watch list by regulators and monitored closely.