Bank Examination fop Safety and Soundness by Bank Regulators
Every bank in America is examined on a regular basis (if it is a large bank, the OCC would have permanent examiners on-site throughout the year) or on a cyclical basis (in the case of smaller banks, the cycle would be from 12 months in the case of banks that need closer supervision to 18 months for low-risk banks that are known to have capable and wise management and was proven to have a good track record of compliance and low risk to its reputation, safety, and soundness). Box 8.2 presents a typical request letter sent from the OCC regulators to a bank president (in this case, it was me as a president of the Bank of Whittier, NA) to enumerate and prepare all the documents needed to examine the bank. The reader will appreciate the detailed nature of the examination as shown in the large number of requests in the request letter; it is usually conducted by five to eight examiners over a period of three to four weeks — or more, depending on the size, the complexity of operations, bank products and services, and the condition of the bank. After concluding the examination, the bank is rated by the OCC according to each of five important parameters: capital (C), assets (A), management (M), earnings (E), liquidity (L), and sensitivity (S) to market risk (combining each of the first letters of each category gives the acronym CAMELS). A bank with a rating of 1 or 2 is considered superior, and of less than satisfactory status if it is rated 3, which means Needs Improvement. A bank that is rated 4 or below is required to agree to a memorandum of understanding with the regulators, in which the bank management makes promises in writing to the regulators about how it will operate and fix its problems according to a preapproved plan and a well-defined time table in the future. Or if the bank is in bad shape, it gets a cease and desist (C&D) order, which essentially freezes its operations in a stop and fix format in order to improve its status, and if not fixed, its charter (license) is revoked.
It is also important to note that not all regulations are tested and examined every year. In some years, in addition to the regular examination process, the regulators would also focus their attention on an issue or a number of issues that are considered to be of a high-risk nature (e.g., if there is a high historic risk of flooding in the year of the examination, the OCC examination pays a close attention on flooding compliance). It is also interesting here to recommend that compliance with the RF laws (Shari'aa) could be a part of this examination process in cases when a bank chooses to operate in an RF mode or chooses to include RF banking services as part of its service to the public.
Box 8.2 is a copy of what a bank receives from the regulators in order to prepare for the annual regulatory examination.
-  The request letter sent by OCC to Bank of Whittier president in March 2008 to request documents that will help in their examination of the bank.