Seal of the Board of Governors of the Federal Reserve System

WASHINGTON, D. C.  20551


SR 94-12 (FIS)
February 24, 1994


SUBJECT: The Federal Reserve System's Definition of a Full Scope, On-Site Examination for Safety and Soundness

                        Section 111 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) generally requires that each appropriate federal banking and thrift agency conduct a full scope, on-site examination of federally insured depository institutions under its jurisdiction at least once during each 12 month period. In addition, as part of the recent review of examination and supervisory policies and procedures, recommendations have been made concerning the definition of what constitutes a full scope examination for safety and soundness.  In order to comply with section 111 of FDICIA and to implement these recommendations, the Federal Reserve is adopting a minimum definition for a full scope on-site examination.

                        The definition of full scope examination articulated below represents minimum guidelines for full scope, safety and soundness examinations conducted by the Federal Reserve System. The definition includes the traditional CAMEL evaluation and also covers the safety and soundness requirements of FDICIA and other supervisory concerns.  This definition formalizes certain supervisory goals to achieve greater consistency in practice among Reserve Banks without limiting each Reserve Bank's flexibility in addressing its supervisory task.  The objective in defining a full scope, safety and soundness examination is to develop a minimum guideline for full scope examinations that is sufficiently precise to ensure the System meets FDICIA's requirement in a consistent and comprehensive manner.  

                        As is the case under the current CAMEL framework, meeting the objectives of a full scope examination will entail the use of different examination procedures and techniques depending on the size, condition, product orientation, and location of institutions. Nevertheless, if the basic areas covered in this definition are reviewed, full scope coverage will be achieved.

                        In summary, the definition of a full scope examination includes the safety and soundness components of the Interagency Uniform Rating System for CAMEL, the safety and soundness mandates of FDICIA, and other regulatory priorities.  

                        The definition emphasizes assessing management's performance as regards internal controls and compliance with laws and regulations.  The inclusion of these specific factors does not limit the examiner's discretion in considering other information that is relevant to the condition of the institution supervised, nor does it symbolize a shift away from analyzing the essential performance dimensions which CAMEL has traditionally considered. Rather, it broadens the formal definition of full scope to include related supervisory priorities, while retaining each Reserve Bank's operational flexibility in meeting full scope objectives.


                         The following paragraphs set forth minimum guidelines for full scope examinations.  These guidelines are based on supervisory material adopted by the System when the Uniform Interagency Bank Rating System (CAMEL) was developed and have been expanded to reflect current supervisory priorities.  A full scope examination involves the collection and analysis of data sufficient to allow the examiner-in-charge (EIC) to determine a rating for each of the five CAMEL components.  To make this determination the EIC should ensure that the following financial and managerial factors are considered during the full scope examination.  The order of presentation of factors under each component does not signify relative importance.  

                        It is expected that a full scope examination would be conducted on a consolidated basis, meaning that all subsidiaries of the bank would be evaluated.  The scope of analysis of subsidiaries and the necessity for on-site presence in such subsidiaries and branches of the banking institution should be determined by the EIC after an analysis of the materiality and operational risk inherent in each.  In most cases, an on-site examination of material credit extending (issuing) subsidiaries should be conducted.  

Capital Adequacy

                        The evaluation of capital adequacy should include, but is not limited to, a review of:

  1. assessment of the amount and adequacy of capital as expressed by various capital measurement indices including the appropriate ratios under the prompt corrective action framework;

  2. bank growth experience, plans, and future prospects;

  3. quality and strength of earnings and earnings retention and capital maintenance policy;

  4. the volume of risk weighted assets;

  5. management strength, including the ability to monitor and control risk;

  6. financial strength of subsidiaries, parent, affiliates, and other potential sources of additional capital;

  7. the risk exposure represented in off-balance sheet items;

  8. interest rate risk, concentration of credit risk and risks associated with nontraditional activities;

  9. asset quality and growth; and

  10. adequacy of loan loss reserve.

Asset Quality

                        The evaluation of asset quality should include, but is not limited to, a review of:

  1. the level, distribution, and severity of classified assets including an analysis of classified assets to total assets and capital including compliance with the maximum classified assets to capital ratio and other appropriate ratios;

  2. the adequacy of internal controls, credit underwriting standards and practices, and the quality of loan documentation;

  3. the level, composition, and trend of past due, nonaccrual and reduced-rate assets;

  4. bank's loan loss valuation methodology and charge-off policies including past charge-off and reserve experience;

  5. ability to identify, administer and collect problem credits;

  6. concentration of on- and off-balance sheet credits or investments including the magnitude and severity of the concentrations;

  7. nature and volume of special mention assets;

  8. comprehensiveness of and adherence to lending, investment, and trading policies;

  9. adequacy of credit administration, including real estate owned, problem assets and real estate appraisal practices;

  10. quality and control of off-balance sheet items, including assets sold with recourse, derivative products and netting policies and practices; and

  11. exposure to insiders.  

                        A critical factor in the examination process is the accuracy and reliability of credit review.  The organization and scope of the asset quality assessment varies at each financial institution based on relevant risk factors such as the institution's size and condition and complexities, concentrations within the portfolio, recent trends in asset quality, the adequacy of internal controls and loan documentation, the appropriateness of lending policies, practices and underwriting guidelines, and management structure and philosophy related to lending.  Adequate loan review coverage is needed for an examination to be considered full scope.  In order to ensure that the loan review is of adequate scope examiners should refer to the Federal Reserve's guidelines for selecting loan samples.  In addition, examiners should select a loan sample of sufficient size to enable the examiner to ascertain the bank's compliance with applicable laws and regulations and to make an overall assessment as to the safety and soundness of the banks's lending function and the condition of its loan portfolio.

Evaluation of Management/Administration

                        The evaluation of management/administration should include, but is not limited to, a review of:

  1. technical competence, leadership and administrative ability;

  2. compliance with relevant banking regulations and statutes;

  3. effectiveness of internal controls, management information systems and the strength and integrity of the internal and external audit programs;

  4. sufficiency of and adherence to the banks policies and procedures;

  5. ability to identify, measure and control financial1 and operating risks including the adequacy of formal risk management systems;

  6. use of the payments system and effectiveness of controls to prevent misuse;

  7. ability to effectively plan and respond to changing circumstances, including strategic planning and the adequacy of management information systems;

  8. management depth and succession planning;

  9. tendencies toward self dealing and transactions with related organizations;

  10. compensation standards, including safeguards to prevent against the payment of excessive compensation;

  11. management's philosophy with respect to dividends;

  12. the accuracy of regulatory reports;

  13. the board of directors' discharge of its responsibilities;

  14. compliance with outstanding supervisory improvement programs (formal and informal); and

  15. the overall condition of the institution.


        The evaluation of earnings should include, but is not limited to, a review of:

  1. quality and future prospects for core income;

  2. the ability to cover losses and maintain adequate capital including compliance with the minimum earnings standard;

  3. earnings levels and trends;

  4. the composition of earnings and sustainability of the various earnings components;

  5. peer group comparisons;

  6. vulnerability to interest rate and other market or price risks;

  7. the reliability of the bank's income and expense accounts, including applicable accounting practices, internal controls, and audit methods;

  8. compliance with laws and regulations relating to earnings and dividends; and

  9. the effectiveness of management's budgeting process.

                        Consideration must also be given to the interrelationships that exist between the dividend payout ratio, the rate of growth of retained earnings, and the adequacy of bank capital.  Consideration should be given to the adequacy of loan loss provisions to the loan loss reserve and the extent to which extraordinary items, securities transactions, and tax effects contribute to net income.  The links between earnings and liquidity and the implications of a bank's funds management decisions, particularly with respect to interest rate sensitivity, should also be fully analyzed.  


                        An evaluation of liquidity should include, but is not limited to, a review of:

  1. the volatility and structure of deposits;

  2. reliance on interest sensitive funds and frequency and level of borrowings;

  3. technical competence of management with respect to structure of liabilities;

  4. access to money markets or other ready sources of cash;

  5. availability of assets readily convertible into cash at a reasonable cost;

  6. bank's reputation and image in market;

  7. outstanding commitments to provide funds;

  8. funds management program to determine the adequacy of contingency planning and the reasonableness of established parameters;

  9. internal reports to determine if management is provided the necessary information for informed funds management decisions and if risks are appropriately monitored; and

  10. implications of overall financial condition or suitability of funding sources.

Specialty Examinations

                        A full scope, on-site examination does not necessarily include any of the specialty areas.  However, if a review of specialty areas (e.g. EDP and Trust) has revealed less than satisfactory performance, this performance should be considered in assessing management strength and should be reflected in the CAMEL rating.

                        The definition is applicable for all full scope, safety and soundness examinations begun during 1994 and thereafter.  Any questions regarding the definition should be referred to Jim Garner, Deputy Associate Director or Bill Spaniel, Assistant to the Director, at the Board.

Richard Spillenkothen


1.  Financial risks may include: credit risk, concentrations, interest rate risk, trading risk, or nontraditional activities.  Return to text

SR letters | 1994